» 


O.  HOWARD  WOLFE 


AMERICAN  lftSTnt!TE  OF  BAKKIMG 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/elementarybankinOOwolfrich 


Elementary  Banking 


BY 


O.  HOWARD  WOLFE 

Associate,  American  Institute  of  Banking 

Assistant  Educational  Director,  A.  I.  B. 

Past  President,  New  York  Chapter 


CORRESPONDENCE  CHAPTER,  Inc. 
AMERICAN  INSTITUTE  OF  BANKING 

FIVE  NASSAU  STREET,  NEW  YORK 


Copyright,  1915 
By  O.  HOWARD  WOLFE 


M.  B.  BROWN  PRINTING  ft  BINDING  CO. 
37-41   CHAMBERS  ST.     NEW  YORK  CITY 


Preface 

This  book  is  not  the  result  of  any  preconceived  theories 
on  methods  of  education  in  banking.  Neither  does  it  make 
any  pretense  of  being  complete  as  to  the  subjects  covered 
nor  exhaustive  in  its  treatment  of  them.  It  is  based  on 
fifteen  years  of  practical  experience,  beginning  with  a  small 
country  bank  and  extending  through  eleven  years  with  a 
large  city  bank.  To  this  first-hand  knowledge  of  the  edu- 
cational needs  of  the  beginner  in  banking  has  been  added 
four  years  spent  in  the  teaching  of  banking  subjects  to 
young  men  in  the  various  chapters  of  the  American  Institute 
of  Banking.  The  subject  matter  presented  herewith  con- 
sists in  the  main  of  a  series  of  lectures  delivered  to  a  class 
of  younger  men  in  New  York  Chapter.  This  book  is  in- 
tended for  the  young  man  just  entering  the  bank  from 
school  and  too  new  in  the  business  to  be  able  to  undertake 
the  regular  Institute  study  course.  No  other  text  book  so 
far  as  the  writer  knows  is  designed  to  meet  this  particular 
need.  The  method  of  treatment  is  to  explain  the  underlying 
principles  not  only  of  bank  accounting,  but  of  the  everyday 
transactions  that  are  common  to  all  forms  of  banking.  The 
danger  of  the  small  bank  is  that  it  tends  to  narrow  the 
horizon  of  the  young  banker,  while  in  the  large  bank  the 
beginner  too  often  regards  his  institution  as  something 
inhuman  that  moves  along  as  entirely  independent  of  him 
or  his  associates  as  if  it  were  a  part  of  the  solar  system. 
Another  difficulty  confronting  the  beginner  is  that  when  he 
does  feel  the  need  of  instruction  he  is  apt  to  fall  a  victim  to 
the  advice  of  well-meaning  but  untrained  "instructors," 
who  attempt  to  teach  him  banking  by  explaining  the  use  of 
accounting  forms. 

The  two  most  prevalent  misconceptions  that  tend  to 
restrict  banking  progress  are  first,  that  the  bank  clerk  or 

3 

337388 


PREFACE 

officer  needs  no  other  technical  education  than  the  experience 
gained  at  his  own  desk,  and  as  a  result  of  the  first  idea,  that 
banking  is  a  matter  of  accounting  systems  only.  It  is  the 
hope  of  the  author  that  this  little  volume  in  spite  of  its 
manifest  limitations  may  be  the  means  of  assisting  the  boy 
through  that  very  trying  period,  his  first  year  in  a  banking 
house. 

O.  H.  W. 


"A  successful  banker  is  composed  of  about  one-fifth 
accountant,  two-fifths  lawyer,  three-fifths  political  economist, 
and  four-fifths  gentleman  and  scholar — total  ten-fifths — 
double  size.  Any  smaller  person  may  be  a  pawnbroker 
or  a  promoter,  but  not  a  banker." — Geo.  E.  Allen. 


Elementary  Banking 

Banking  as  a  Vocation 

Every  young  man  who  goes  into  a  bank,  whether  from  the 
schoolroom  or  from  some  other  business,  should  make  up 
his  mind  very  early  that  the  work  is  not  easy  and  the  only 
way  he  may  succeed  is  to  begin  a  systematic  study  of  banking 
as  a  science.  This  study,  supplemented  by  diligent  attention 
to  his  work,  will  secure  to  him  that  success  which  is  the  only 
sure  kind  of  success,  built  upon  his  own  ability  rather 
than  upon  the  favor  of  his  superior  officers.  Those  personal 
qualities  such  as  honesty,  courtesy,  cleanliness  and  punc- 
tuality, which  have  been  impressed  upon  him  as  abstract 
virtues  in  the  everyday  walks  of  life,  in  the  banking  business 
become  concrete  necessities. 

Physical  strength,  endurance,  a  clear  eye,  speed  and 
stamina  are  sought  after  by  every  manly  youth,  whatever 
his  occupation,  but  to  the  professional  ball  player  they  are 
his  stock  in  trade.  So  it  is  with  banking.  The  commonest 
daily  transactions  are  of  such  a  nature  that  virtues  which 
we  would  admire  in  the  average  individual  are  absolutely 
necessary  to  the  banker,  whether  he  be  officer  or  clerk. 
The  bank  will  be  successful  to  the  extent  that  its  depositors 
and  other  clients  have  confidence  in  it  and  those  associated 
with  it,  not  only  as  regards  their  judgment  in  business 
matters,  but  also  their  moral  character.  It,  therefore,  be- 
comes a  part  of  the  education  of  the  bank  man  to  fix  in  his 
mind  certain  rules  of  conduct  which  may  be  here  set  down 
as  a  sort  of  ten  commandments. 

1.  Keep  clean  physically,  mentally  and  morally. 

2.  Cultivate  a  wide  acquaintance,  but  choose  your 
associates  from  among  those  known  to  be  of  good  character. 

5 


ELEMENTARY  BANKING 

3.  Live  within  your  income  and  look  upon  money  saved 
as  a  part  of  your  fixed  expenses. 

4.  Be  exact  in  all  your  dealings  and  always  keep  your 
word. 

5.  Pay  your  debts  and  meet  your  obligations  when  they 
are  due. 

6.  Pay  strict  attention  to  orders  and  obey  them  implicitly. 

7.  Show  a  willingness  to  do  more,  rather  than  less,  than 
is  expected  of  you. 

8.  Know  your  job  and  don't  be  content  with  less  than 
all  there  is  to  know  about  it. 

9.  Spend  a  part  of  each  year  in  systematic  study  and 
reading  on  banking  subjects. 

10.  Keep  in  strict  confidence  every  transaction  of  the 
bank  of  whatever  nature. 

There  are  many  other  such  rules  that  might  be  suggested, 
but  these  must  not  be  passed  over  as  mere  platitudes. 
Nearly  all  large  financial  institutions  have  similar  instruc- 
tions prominently  posted  and  any  infraction  of  the  regulations 
is  met  with  immediate  dismissal.  One  large  Canadian 
bank'  hands  to  each  employee  a  bound  copy  of  rules  that 
are  to  govern  his  conduct  in  all  matters. 

The  next  important  fact  that  must  be  accepted  is  that 
banking  is  a  profession  based  upon  scientific  data.  The 
physician  cannot  hope  to  learn  medicine  through  personal 
experience  and  experiment  upon  his  own  body  in  curing  all 
the  diseases  and  disasters  that  flesh  is  heir  to.  Many 
bankers,  and  especially  the  younger  and  inexperienced, 
deceive  themselves  with  the  idea  that  they  can  learn  all 
they  need  to  know  by  close  application  to  their  own  im- 
mediate desks,  counters  and  communities;  Just  as  the 
science  of  surgery  and  medicine  is  based  upon  the  natural 
laws  of  the  human  body,  so  the  science  of  banking  grows 

6 


ELEMENTARY  BANKING 

out  of  economic  laws  that  are  at  the  base  of  all  business 
activity. 

The  young  man  who  has  adopted  banking  as  a  career, 
must  decide,  therefore,  what  his  attitude  will  be  toward 
these  conditions  which  he  can  not  escape  although  they  can 
be  mastered.  Every  town,  if  indeed  not  every  bank,  can 
furnish  at  least  one  example  of  the  man  who  thought  other- 
wise until  it  was  too  late.  It  is  not  to  be  imagined  that  by 
following  a  certain  formula  of  conduct  any  clerk  may  rise 
by  regular  stages  until  he  will  become  cashier  or  president 
of  his  bank.  By  increasing  his  own  efficiency,  he  uncon- 
sciously is  elevating  banking  standards,  which  in  turn,  will 
react  upon  him  to  his  lasting  benefit.  Every  man  in  the 
bank  should  be  a  banker,  although  in  different  degrees  of 
development,  whether  he  be  messenger  or  chairman  of  the 
board  of  directors. 

In  the  thickly  settled  and  highly  developed  countries  of 
Europe,  it  is  said  that  it  is  the  aim  of  all  those  who  work 
for  salaries  or  wages,  not  to  try  to  secure  better  positions, 
but  to  hold  what  they  already  have.  Fortunately,  we  are 
not  confronted  with  this  condition  in  America,  but  we  are 
fast  approaching  it.  Efficiency  will  ultimately  determine 
every  man's  status  whether  he  be  banker  or  bricklayer. 


Wealth  and  Money 

Banks  are  institutions  with  a  threefold  relation  to  money; 
they  receive  money  on  deposit,  they  loan  money  and  they 
issue  money.  There  are  two  additional  functions  closely 
related  to  the  others,  if  not  identical  with  them;  banks 
borrow  money  and  invest  money.  It  may  be  added  that 
banks  also  transfer  money,  but  this  applies  to  credit  rather 
than  to  money.  In  the  popular  mind  and  in  actual  practice 
banks  are  identified  with  the  use  of  money  to  such  an  extent 
that  it  is  impossible  to  get  a  clear  conception  of  banking 
functions  without  some  knowledge  of  money.  This  involves 
study  of  economic  laws  which,  as  we  have  intimated,  are 
the  forces  that  control  banking  just  as  natural  laws  govern 
engineering,  medicine,  navigation  or  other  sciences. 

All  our  modern  complicated  systems  of  commerce,  trade 
and  business  in  general  grow  out  of  the  simple  fact  that  man 
has  certain  wants  which  must  be  satisfied.  He  must  be 
fed,  clothed  and  housed.  These  are  the  primary  wants. 
After  them  come  education,  religion  and  social  needs  and 
so  on  from  the  sheer  necessities  of  life,  to  the  luxuries.  The 
predominant  characteristic  of  human  wants  is  that  they  are 
unlimited;  each  want  satisfied  leads  to  another  and  in  the 
effort  to  secure  what  we  need,  habits  are  formed  which,  in 
turn,  fix  standards  of  living  for  men  and  nations. 

The  term  used  to  define  things  that  satisfy  wants  is 
wealth,  which  consists  of  anything  that  ministers  to  our 
pleasure  or  happiness  and  serves  to  keep  away  pain  or 
discomfort.  Three  factors  enter  into  the  creation  of  wealth: 
land,  labor  and  capital.  The  first  includes  the  surface  of 
the  earth  and  all  that  is  above  or  below  it,  in  short,  land  is 
natural  resources.  The  second  factor  is  man  himself,  who 
by  the  application  of  his  strength  and  skill  converts  the  raw 
material  of  the  field,  the  forest  or  the  mine  into  such  form 

8 


ELEMENTARY  BANKING 

that  he  can  make  use  of  the  wealth  thus  created.  This  is 
labor.    The  third  factor  is  capital. 

Of  all  economic  terms  in  common  use,  the  three  most 
generally  confused  are  capital,  wealth  and  money.  They  are 
not  by  any  means  synonymous.  We  have  seen,  first,  what 
wealth  is,  and  we  have  learned  that  there  are  three  factors 
that  go  to  produce  it.  The  first  two  produce  directly,  while 
capital  produces  indirectly  through  the  other  two.  Capital 
is  wealth  that  works  in  the  production  of  more  wealth.  For 
example,  the  miner  applies  his  labor  to  the  vein  of  coal  and 
produces  wealth  in  the  form  of  fuel.  He  uses  a  pick  and 
other  implements;  a  track  is  built  into  the  mine  over  which 
cars  are  hauled  by  a  small  compressed-air  motor;  at  the 
mouth  of  the  shaft  is  an  elevator  operated  by  an  engine  and 
other  machinery.  These  implements,  tools,  machinery,  etc., 
are  capital.  If  the  capital  of  the  mine  is  $100,000,  it  means 
that  this  machinery  cost  that  amount  of  money.  The  money 
itself  is  gone  into  other  hands  in  the  process  of  circulation. 
In  the  banking  business,  money  is  the  raw  material  so  to 
speak,  so  that  the  terms  capital  and  money  are  nearly 
synonymous  as  applied  to  banks.  How  capital  arises  will 
be  discussed  later. 

An  object  is  said  to  have  utility  when  it  satisfies  a  want. 
Value  exists,  however,  only  when  an  effort  or  sacrifice  of 
some  sort  is  required  to  secure  the  object  having  utility. 
The  value,  therefore,  depends  largely  on  the  extent  or  degree 
of  the  sacrifice  necessary  to  obtain  use  of  the  thing  desired. 
Let  us  suppose  a  man  owns  a  farm  in  one  corner  of  which 
he  finds  a  hard,  black  stony  deposit  not  useful  for  anything 
so  far  as  he  can  discover.  A  neighbor,  upon  experiment, 
learns  that  the  black  stones  will  burn  and  so  possess  utility. 
Thereupon  he  gives  the  man  who  owns  the  coal  some  of  his 
wheat  in  exchange  for  the  fuel  and  thus  the  coal  becomes 
valuable.     It  is   power    of    exchange    that   bestows   value. 

9 


ELEMENTARY  BANKING 

Thus  a  thing  may  be  very  useful,  as  for  example,  water,  but 
of  no  value  unless  it  can  be  exchanged  for  something  else. 

Exchange  is  the  process  of  giving  and  taking  one  thing 
for  another.  It  is  not  necessary  for  each  of  us  to  produce 
for  ourselves  all  the  things  that  we  need.  The  farmer 
raises  potatoes,  but  he  does  not  need  to  make  his  own 
shoes.  He  may  exchange  his  potatoes  with  a  shoemaker 
for  a  pair  of  boots.  But  this  would  be  a  clumsy  process 
since  each  one  who  had  anything  to  trade  would  need  to 
find  someone  who  was  willing  to  exchange  for  something 
else  that  was  wanted.  Therefore,  a  medium  of  exchange 
becomes  necessary  and  this  medium  of  exchange  we  call 
money.  Money  may  be  anything  that  the  producer  will 
accept  in  exchange  for  his  product,  but  it  must  have  value 
in  itself  or  else  we  will  not  be  able  to  exchange  our  money 
for  other  goods.  It  must  be  something  that  does  not  exist 
in  too  abundant  quantity  else  it  will  require  no  sacrifice  to 
secure  it  and  it  will,  therefore,  lose  its  value.  It  must  be 
easily  recognized  or  else  it  may  be  counterfeited  and  so  there 
will  be  no  confidence  in  it.  It  must  contain  large  value  in 
small  bulk,  or  it  will  not  be  convenient  for  use.  It  must  be 
durable,  so  that  it  can  be  stored  up  for  future  use.  Finally, 
it  must  be  of  a  material  that  will  not  be  destroyed,  by  being 
divided  and  redivided,  which  is  necessary  since  the  same 
quantity  or  values  will  not  always  be  offered  in  exchange. 
There  is  but  one  material  that  possesses  all  these  qualities 
and  that  is  gold.  Hence,  by  a  long  process  of  experiments 
and  eliminations,  all  large  nations  have  come  to  the  con- 
viction that  gold  is  the  ideal  medium  of  exchange.  In  order 
to  prevent  any  controversy  that  might  arise  between  the 
buyer  and  seller  as  to  the  purity  or  weight  of  the  gold  offered 
in  exchange,  the  government  coins  it  in  metal  discs  and 
then  by  a  stamp,  certifies  as  to  the  quantity  and  quality  of 
the  bullion  contents.     This  is  called  coinage. 

10 


ELEMENTARY  BANKING 

Not  all  money  is  gold,  however.  There  are  three  kinds 
in  all,  standard  money,  which  is  usually  gold;  credit  money, 
generally  made  of  paper;  and  token  money,  which  is  the 
small  change,  the  bullion  contents  of  which  are  less  than  the 
coin  value.  In  the  United  States  there  are  more  varieties 
of  these  three  kinds  of  money  in  circulation  than  in  any 
other  country.  We  have  gold  coins ;  gold  certificates,  which 
are  practically  the  same  thing;  standard  silver  dollars  and 
silver  certificates;  fractional  silver;  nickels  and  cents; 
Treasury  notes,  which  were  issued  to  purchase  silver  bullion 
and  are  then  redeemed  when  presented,  the  bullion  having 
been  coined;  U.  S.  notes,  or  "greenbacks,"  which  are  called 
"fiat"  money  because  the  government  forces  their  circula- 
tion; and  bank  notes.  For  some  years  to  come,  we  will 
have  three  kinds  of  bank  notes  in  circulation;  the  national 
bank  notes,  Federal  reserve  notes,  and  the  notes  issued  by 
the  Federal  reserve  banks,  secured  by  U.  S.  bonds  which, 
beginning  Dec.  23,  1915,  they  may  buy  from  national  banks. 

In  addition  to  being  used  as  a  medium  of  exchange, 
money  has  two  other  uses.  It  is  used  as  a  standard  of 
value  and  as  a  basis  of  deferred  payments  or  credit.  The 
value  of  every  form  of  wealth  is  quoted  in  terms  of  money 
and  in  this  sense  money  is  used  as  a  standard  of  value. 
This  use  of  money  causes  many  people  to  confuse  money 
with  wealth.  The  third  use  of  money,  as  a  basis  of  credit, 
or  payments  to  be  made  at  a  later  date,  is  an  important  one 
from  a  banking  viewpoint  because  it  is  this  use  of  money 
that  is  involved  in  bank  deposits.  Bank  deposits,  for  ex- 
ample, may  be  set  down  for  the  entire  country  at  about  18 
billions  of  dollars  (1915),  whereas  there  are  less  than  4 
billions  of  money,  the  medium  of  exchange  in  the  United 
States. 

It  is  not  necessary  that  there  should  be  as  much  money 
as  is  represented  by  other  forms  of  wealth.    Using  money 

11 


ELEMENTARY  BANKING 

as  a  standard  of  value,  we  may  say  a  certain  building  is 
worth  $10,000,  an  automobile,  $1,000,  your  watch,  $20,  your 
hat,  $2,  and  so  on.  But  since  these  things  are  not  pur- 
chased by  each  of  us  every  day,  the  nation  as  a  whole  will 
need  only  as  much  money  as  is  required  to  make  exchanges. 
And  so  with  bank  deposits.  If  every  depositor  wished  to 
withdraw  his  balance  in  cash  daily,  there  could  not  be  a 
larger  amount  of  bank  deposits  represented  by  a  money 
value,  than  there  was  actual  money  in  the  country.  Panics 
are  due  to  the  fact  that  people  confuse  values  with  money 
and  when  everyone  tries  to  "sell"  or  convert  his  standard- 
of-value  money  and  basis-of-credit  money  into  medium-of- 
exchange  money,  there  isn't  enough  to  go  around.  Banking 
comes  to  the  rescue  in  such  a  situation  with  the  note-issuing 
function  which  will  be  explained  later. 

Through  the  use  of  checks  and  banking  mechanism,  bank 
deposits  are  also  a  form  of  credit  money.  If  A  wishes  to 
pay  B  ten  dollars,  both  having  bank  accounts,  A  writes  his 
check  or  order  upon  his  bank  for  that  amount  and  gives  it 
to  B,  who  deposits  the  check  to  his  credit.  No  actual  money 
changes  hands,  the  entire  transaction  consisting  of  debit 
and  credit  book  entries.  Here  again  we  see  why  it  is  not 
necessary  to  have  as  much  medium  of  exchange  money  as 
we  have  bank  deposits. 


12 


Why  Banks  are  Necessary 

We  have  discussed  the  relation  of  banks  to  money  in  the 
previous  chapter.  We  have  seen  how  money  is  necessary 
to  industrial  and  commercial  progress,  not  because  of  its 
own  intrinsic  worth  but  because  it  makes  exchange  possible. 
We  can  next  take  up  a  consideration  of  the  part  that  banks 
play  in  the  development  of  industry  and  wealth.  Of  all  the 
great  institutions  that  serve  the  people,  such  as  schools  and 
colleges,  churches,  railroads,  the  postofiice,  newspapers  and 
banks,  the  public  knows  least  about  banks.  To  the  average 
person,  they  are  places  fitted  up  with  vaults  where  savings 
may  be  stored,  where  clerks  keep  records  of  the  balances 
which  the  bank  will  pay  back,  plus  the  interest  that  in  some 
mysterious  way  has  accumulated.  And  too  often  the  bank 
clerk  is  content  to  think  of  the  bank  only  as  an  institution 
that  requires  him  to  report  at  a  certain  hour  in  the  morning, 
post  figures  in  books,  the  real  nature  of  which  he  does  not 
understand,  and  then  go  home  at  night  after  he  has  struck 
a  balance.  The  bank  clerk  ought  to  know  why  banks  are 
necessary  and  how  important  are  their  functions,  not  only 
because  it  will  enable  him  to  work  more  intelligently,  and 
with  greater  interest  in  his  work,  but  he  will  also  be  able  to 
explain  the  nature  of  banking  to  other  people,  many  of  whom 
distrust  banks  because  they  do  not  understand  them. 

Banks  owe  their  origin  to  the  simple  law  of  nature  that 
everything  that  lives  grows  and  expands. 

Nature  is  very  generous  and  has  so  arranged  her  scheme 
of  production  and  increase  that  every  one,  in  fact  every 
living  thing,  has  in  him  or  it  the  power  to  produce  more  than 
is  needed  for  immediate  consumption  to  sustain  life.  The 
bee,  the  ant  and  the  squirrel  store  up  surplus  summer  food 
for  the  winter;  the  mountain  uplands  and  valleys  nourish 
the  deer  and  other  wild  creatures  with  an  abundance  each 

13 


ELEMENTARY  BANKING 

season  renews.  And  man,  in  a  civilized  state  of  industry, 
can  through  his  labor  in  any  direction,  produce  more  than 
he  needs  for  his  own  sustenance.  Perhaps  it  is  nature's 
plan  that  he  shall  produce  in  his  youth  what  he  must  consume 
in  his  old  age. 

With  the  development  of  exchange  and  the  use  of  money 
this  power  to  create  surplus  wealth  is  harnessed.  The  sur- 
plus wealth,  converted  into  money,  is  laid  aside — deposited 
in  banks — for  future  consumption  and  thus  capital,  the  third 
factor  of  production,  has  its  origin.  Wealth  instead  of  being 
allowed  to  lie  idle,  is  set  to  work  to  produce  more  wealth, 
which  is  good,  since  wealth  is  anything  that  adds  to  human 
welfare.  Let  us  see  how  the  bank  sets  money — the  result 
of  work — to  work  in  turn. 

Without  exchange,  when  man  was  in  the  savage  or  pas- 
toral stage,  he  produced  for  himself  everything  he  consumed. 
As  soon  as  he  began  to  confine  his  labor  to  one  particular 
thing  which  he  would  sell  or  exchange  when  completed,  he 
began  to  feel  the  need  of  credit,  that  is,  the  power  to  borrow 
from  his  neighbor  for  sustenance  until  he  was  able  to  use 
or  sell  his  own  product.  Of  course,  he  would  borrow  not 
the  actual  goods,  but  the  money  to  purchase  them.  Under 
modern  conditions,  money  is  borrowed  and  loaned  for  hun- 
dreds of  purposes  and  in  many  different  ways,  but  the 
underlying  principle  is  always  the  same. 

For  example,  the  farmer  plants  his  crop  in  the  spring; 
he  must  buy  seeds,  pay  for  labor  and  keep  his  family  in  food 
and  clothing  until  the  fall  when  his  harvest  ripens  and  can 
be  sold.  The  store-keeper  or  merchant  fills  his  shelves  with 
endless  variety  of  goods,  part  of  which  he  has  bought  with 
his  own  capital  and  part  with  money  he  has  borrowed  to  be 
paid  back  when  his  goods  are  sold.  The  builder  erects  a 
dwelling  or  larger  edifice  for  which  he  must  buy  labor  and 
material.    He  will  need  money  until  his  contract  is  com- 

14 


ELEMENTARY  BANKING 

pleted.  Railroads  are  built,  mines  developed,  crops  must  be 
moved,  new  enterprises  financed  and  so  on  without  limit, 
borrowed  money  making  possible  all  these  vast  facilities  that 
are  indispensable  to  modern  civilization. 

These  conditions  would  be  as  nearly  impossible  without 
banks  as  would  be  an  efficient  exchange  system  without 
money.  If  everyone  who  needed  to  borrow  money  was 
forced  to  search  about  for  someone  who  had  just  the  right 
amount  to  loan,  there  wouldn't  be  much  business.  Fur- 
thermore, those  who  had  money  to  loan  would  need  to  be 
acquainted  in  each  case  with  the  borrower's  ability  to  repay 
the  debt  else  there  would  be  loss  and  ultimate  ruin. 

Banks  are  storehouses  where  the  equivalent  of  surplus 
wealth — money — may  be  accumulated  and  loaned  for  the 
purpose  of  creating  more  wealth.  Thus  it  will  be  seen  that 
still  another  virtue,  thrift,  which  we  are  accustomed  to  urge 
upon  men  as  bringing  its  own  reward,  is  after  all  a  cold 
business  necessity.  Men  must  work,  produce  surplus 
wealth,  save  a  part  of  it  or  there  will  be  no  storehouse  of 
money  and  credit  which  is  so  essential  to  the  production 
of  both  the  necessities  and  luxuries  of  life.  The  humble 
wage  earner  who  puts  aside  even  a  small  fraction  of  his 
income  is  doing  more  than  fortify  himself  against  the 
future.  His  accumulated  savings  added  to  those  of  all 
other  classes,  rich  and  poor,  placed  in  banks  and  by  them 
loaned  out,  make  possible  the  industry  that  gives  work  and 
sustenance  to  all. 

There  are  many  ways  in  which  money  is  deposited  and 
loaned  or  invested.  For  this  reason,  there  are  several  dif- 
ferent kinds  of  banks.  The  same  principles  are  involved 
in  each  case,  however,  and  the  young  bank  man  who  would 
become  a  banker  is  cautioned  against  the  common  error  of 
thinking  that  each  kind  of  bank  is  peculiar  unto  itself  and 
so  requiring  a  different  course  of  study. 

IS 


Classes  of  Banks 

It  is  conceivable  that  one  kind  of  bank  could  meet  the 
banking  needs  of  all  the  people,  and  in  fact  such  a  condition 
is  approximated  in  a  little  one-bank  town  where  the  institu- 
tion may  be  either  a  state  or  national  bank,  a  savings  banl: 
or  a  trust  company.  Sometimes  it  is  a  private  bank.  Gen- 
erally speaking,  however,  the  so-called  commercial  bank  is 
the  variety  to  be  found  where  there  is  but  a  single  bank. 
Similarly,  in  larger  cities,  we  find  trust  companies  which, 
when  the  state  laws  do  not  contravene,  perform  practically 
every  financial  service  except  that  of  note  issue. 

Banks  are  generally  classified  as  follows:  Commercial 
banks  (either  national  or  state),  trust  companies,  savings 
banks  and  private  banks.  The  building  and  loan  associa- 
tion is,  in  principle,  a  banking  organization  and  some  forms 
of  life  insurance  are  closely  allied  to  banking.  Each  has  its 
particular  specialty  or  function  which  characterizes  it.  The 
fact  that  there  are  these  different  groups,  instead  of  one 
general  kind  of  bank,  is  due  partly  to  natural  development 
and  partly  to  design.  Since  all  banking  in  principle  is 
identical  and  governed  by  the  same  economic  laws,  it  is  not 
surprising  to  note  the  tendency  in  legislation  to  bring  them 
all  closer  together.  For  example,  the  Federal  Reserve  Act 
provides  that  trust  companies  may  take  out  national  charters 
under  certain  conditions,  while  at  the  same  time,  national 
banks,  when  not  in  contravention  with  state  laws  may  act 
in  a  "fiduciary  capacity,"  that  is,  perform  functions  usually 
limited  to  trust  companies.  The  right  of  both  commercial 
banks  and  trust  companies  to  accept  savings  deposits  is 
universally  conceded.  They  frequently  conduct  bond  de- 
partments, thus  encroaching  upon  what  was  formerly  the 
especial  field  of  the  private  banker  who  is  usually  an  "in- 
vestment banker."    The  private  banker,  in  turn,  very  fre- 

16 


ELEMENTARY  BANKING 

quently  does  a  large  commercial  business  and  many  states 
are  revising  their  banking  laws,  which  will  bring  him  under 
the  direct  supervision  of  the  banking  department.  The 
conclusion,  therefore,  is  that  although  the  specialist  is  more 
in  demand  than  ever,  every  banker  should  be  trained  along 
broad  lines. 

The  close  relation  between  banks  of  different  kinds  will 
be  demonstrated  more  clearly  by  referring  to  the  organiza- 
tion charts  and  the  statements  of  condition  shown  on  pages 
22  and  23.  The  difference  between  banks  is  precisely  the 
difference  between  the  classes  of  people  whom  they  serve. 
The  savings  bank  is  usually  the  bank  of  the  small  depositor, 
the  wage  earner  and  the  thrifty  of  all  classes;  the  trust 
company  gives  its  services  more  especially  to  those  who 
have  fixed  incomes  from  investments;  land  owners  and 
corporations.  The  commercial  bank,  as  the  name  signifies, 
does  business  with  manufacturers,  tradesmen,  merchants 
and  others  v/ho  "turn"  their  money  at  seasonal  intervals. 
Thus  we  have  the  "Dime  Savings  Bank,"  "Home,"  "First 
Penny,"  "Dollar  Savings  Bank"  and  similar  suggestive 
titles.  Among  trust  companies  common  names  are  "Fidel- 
ity," "Guarantee,"  "Provident"  and  "Security."  When  the 
National  Bank  Act  was  first  passed  it  attempted  to  restrict 
the  titles  of  the  banks  to  "First,"  "Second,"  "Third,"  etc., 
but  the  commercial  state  banks  refused  to  accept  the  new 
charters  with  this  provision,  so  the  act  was  amended.  Hence 
we  have  the  "Merchants,"  "Tradesmens,"  or  "Commer- 
cial" national  banks,  while  in  the  agricultural  districts,  where 
the  farmer  is  the  business  man,  the  "Farmers  Bank"  is 
common. 

The  commercial  banks  may  be  said  to  be  the  most  im- 
portant since  they  come  into  close  contact  with  the  industrial 
world.  Upon  them  falls  the  function  of  note  issue  as  well 
as  the  other  two,  deposit  and  discount.     This  is  due  to 

17 


ELEMENTARY  BANKING 

natural  causes,  since  the  greater  the  trade  and  commerce, 
the  greater  will  be  the  need  for  money  or  a  medium  of 
exchange.  Bank  notes  give  the  needed  elasticity  to  cur- 
rency issues.  If  our  crops  were  always  the  same  each 
season,  if  the  population  remained  fixed  in  numbers,  if  each 
citizen  on  a  given  day  of  each  week,  year  in  and  year  out, 
purchased  the  same  article  of  food,  furniture  or  clothing, 
then  our  money  supply  would  not  need  to  possess  the  power 
to  expand  or  contract.  But  conditions  are  fortunately  other- 
wise. Until  the  Federal  Reserve  Act  became  law  the  issue  of 
notes  was  a  prerogative  of  the  national  banks.  Ultimately 
this  function  will  be  taken  over  by  the  Federal  reserve 
banks.  The  process  of  note  issue  is  quite  simple:  the 
issuing  bank  circulates  its  notes — promises  to  pay  on  demand 
— as  money.  In  order  that  there  shall  be  confidence  in  the 
notes,  the  bank  must  be  solvent  and  the  notes  must  be 
redeemed  without  question.  There  must  be  proper  super- 
vision and  control,  else  there  is  danger  of  inflation  or  too 
extensive  an  issue.  Bank  laws  in  every  country  are  con- 
structed to  guard  against  improper  issues  since  banking 
systems  have  proved  successful  or  failures  in  accordance 
with  the  soundness  of  note  issues. 

Banking  history  and  business  experience  have  taught  the 
lesson  that  there  are  times  when  there  must  be  a  bank  of 
banks.  The  great  central  banks  of  Europe  perform  this 
service  abroad,  and  in  our  own  country  the  Federal  reserve 
banks  act  as  the  fly-wheel  and  governor  of  our  financial 
machinery.  Banks  need  to  borrow  just  as  do  individuals, 
and  they  can  concentrate  their  surplus  or  reserve  in  the 
reserve  banks  just  as  people  accumulate  their  savings  in 
ordinary  banks. 


18 


Bank  Organization  and 
Administration 

It  will  not  be  necessary  for  present  purposes  to  describe 
the  detail  of  organization  of  each  of  the  three  main  classes 
of  banks.  The  commercial  bank  plan  of  organization  will 
serve  as  a  model  and,  in  fact,  state  laws  are  often  based 
upon  the  national  bank  act  in  this  respect. 

So  far  as  organizing  a  bank  is  concerned,  the  law  makes 
no  distinction  between  the  large  bank  and  the  small;  in  the 
eyes  of  the  law  they  are  identical.  In  the  early  days,  im- 
mediately following  the  independence  of  the  United  States, 
all  banks  received  their  charters  direct  from  Congress. 
Owing  to  the  misconception  of  banking  and  the  popular 
distrust  of  banks,  it  was  a  hard  matter  to  secure  a  charter, 
consequently  abuses  developed  to  such  an  extent  that  what 
were  known  as  "free  banking  laws"  were  passed  in  the 
several  states  to  correct  the  political  evils  incident  to  bank 
organization.  This  plan  of  procedure  obtains  to  the  present 
day,  and  any  number  of  "natural"  persons,  not  less  than 
five,  may  organize  a  bank.  Articles  of  Association  are 
drawn  up  and  a  Certificate  of  Organization  is  executed. 
The  capital  is  subscribed  and  at  least  half  of  it  must  be  paid 
in  in  money  before  the  bank  may  commence  business.  The 
balance  must  be  paid  in  in  regular  installments  within  five 
months.  The  minimum  amount  of  capital  is  based  on  the 
population  of  the  city  or  town  where  the  bank  is  located. 
The  Comptroller  of  the  Currency  has  power  to  authorize  the 
organization  of  a  national  bank. 

The  bank  must  have  a  president,  a  cashier,  and  at  least 
five  directors.  The  directors  must  own  at  least  ten  shares 
of  stock,  except  when  the  capital  is  not  more  than  $25,000, 
when  five  shares  are  required.  The  directors  are  elected 
by,  and  represent,  the  stockholders  who  are  the  owners  of 

19 


ELEMENTARY  BANKING 

the  bank.  They  meet  at  least  once  a  month  and  direct  the 
policy  of  the  bank.  The  directors  elect  the  officers,  a  presi- 
dent, vice-president,  cashier  and  assistant  cashier,  who  are 
the  executive  heads  of  the  institution  and  are  charged  with 
the  duty  of  administering  its  affairs.  The  number  of  vice- 
presidents  and  assistant  cashiers  depends  upon  the  size  of 
the  bank.  The  clerks  divide  naturally  into  two  groups, 
tellers  and  bookkeepers. 

The  student  must  not  imagine  that  each  bank,  in  its  inter- 
nal affairs,  is  a  law  unto  itself  and  that  the  duties  and  re- 
sponsibilities of  directors,  officers  and  clerks  depends  upon 
the  size  and  location  of  the  bank.  An  acorn  dropped  into 
the  ground  will  dig  into  the  soil  with  its  tiny  roots,  and  send 
up  a  green  shoot  bearing  two  or  more  perfect  leaves.  So 
far  as  plant  organization  is  concerned,  the  embryo  tree  is 
identical  with  the  giant  oak  with  its  sturdy  roots  and  trunk 
and  far-spreading  branches  and  leaves.  So  it  is  with  banks. 
The  duty  goes  with  the  office  rather  than  with  the  man. 
The  responsibility  of  the  directors  is  the  same  in  all  cases. 
In  the  very  large  banks,  we  find  the  board  organized  into  a 
discount  committee,  a  finance  committee,  examination  com- 
mittee, etc.,  in  order  that  the  directors  may  the  better  keep 
in  touch  with  the  affairs  of  the  bank  and  fulfill  their  moral 
and  legal  obligations  to  stockholders  and  depositors. 

In  the  small  country  towns  the  president  is  usually  inac- 
tive. He  may  be  a  business  man  who  drops  into  the  bank 
once  a  day  to  consult  with  the  cashier  who  also  acts  as  teller. 
There  will  be  a  bookkeeper,  who  keeps  all  the  records  and 
acts  as  general  clerk.  Such  an  organization  does  not  mean 
that  the  bank  has  no  teller,  nor  individual  ledger  bookkeeper, 
nor  discount  clerk;  the  same  man  (or  men)  fills  several 
positions,  and  his  responsibilities  are  those  that  go  with  the 
particular  work  in  hand.  Bank  work  may  be  roughly  grouped 
into  three  divisions:   executive,  teller  and  bookkeeping,  and 

20 


ELEMENTARY  BANKING 

this  classification  holds,  no  matter  what  the  size  of  the  bank 
or  whether  it  is  commercial,  trust  or  savings. 

In  large  banks,  for  example,  discount  or  loan  clerks  relieve 
the  officers  of  the  detail  work  incidental  to  the  making  of 
loans,  or  a  credit  man  is  employed  to  collect  and  keep 
records  that  in  a  small  bank  are  kept  in  the  president's 
head.  Instead  of  a  single  teller,  there  will  be  two  or  more, 
one  to  pay,  another  to  receive,  another  to  make  collections, 
and  so  on.  The  work  of  all  tellers  is  alike  in  that  they  come 
into  direct  contact  with  the  bank's  customers.  The  book- 
keepers are  divided  into  those  who  keep  the  general  accounts 
and  those  who  keep  the  accounts  of  individual  depositors. 
These  last  may  be  redivided  into  alphabetical  groups. 

Reference  to  the  organization  chart  shown  on  page  23 
will  assist  the  student  in  grasping  the  general  plan  of  bank 
organization.  The  chart  will  also  indicate  the  usual  methods 
of  division  of  the  work  as  the  bank  increases  in  size.  The 
administration  and  organization  divisions  printed  in  capitals 
are  common  to  all  banks,  although  in  some  cases  they  may 
be  known  by  different  terms.  For  instance  the  directors 
of  a  mutual  savings  bank  are  called  "trustees." 


21 


ELEMENTARY  BANKING 


'To 

d 

f 

co 

u 

o 

0 

CO 

E 

IM 

CO 

■ 

a> 

o 

co 

d 

a, 

B 

o 

■ 

M 

ft 

Q 

»-H 

CN 

fO 

CO 

3 

2 

00 

&l 

"co    CO 

1 

do 

*d  " 

a.  co 

CD    o 

Q    H« 

1 

3 

d  *d 
<7d 

OP 

g 

1° 

d  ^ 
►5  CO 

l-H 

ca 

fO 

1 

o 

*■£ 

ctf 

fc 

CO 

•i« 

rt 

H 

3 

*  d 

d 
o 

'.J3' 
1 

id 

1 

~vPQ  co 
3  a>  §, 

OP 

O 

flfl 

^ 

tN 

CO 

BANK   ORGANIZATION  AND   ADMINISTRATION 


Sa 

B 
«  "S  +2 

2§S 

Ml 

dp 
Bill 


d 
6 

lo 

8     CO 

P.S 

.2    d 
to  CQ 

f* 

3£ 


d 

0) 

I 

K  d 


I 
g 

p 

co 

a 

H 


a 


l 

cu 

5 


o 


pap       3      ;uioddB 


■a 

ctf 

,o 

CD 


s 


i 


S3  S3 

6 


rrt     ^ 


0)  CO 


ifojdraa 


2-~ 

Oh 
O 


23 


Departments  in  a  Bank 

As  soon  as  it  becomes  necessary,  on  account  of  volume  of 
business,  to  divide  the  work  in  a  bank  into  divisions,  each 
employing  a  group  of  clerks,  such  division  is  organized  into 
a  department  having  a  department  head  who  is  usually  a 
teller,  a  head  bookkeeper,  or  perhaps  a  junior  officer.  In 
the  very  large  banks  the  executive  staff  is  itself  organized 
into  groups,  and  there  may  be  a  vice-president  and  one  or  two 
assistant  cashiers  in  charge  of  each  important  department. 

The  work  of  a  department  in  a  large  bank  is  nothing  more 
nor  less  than  the  work  of  a  single  man  in  a  small  bank, 
apportioned  among  several  men.  For  example,  the  receiv- 
ing teller  in  a  five-man  bank  will  take  the  deposit,  count  the 
cash,  examine  the  checks,  assort  them  as  to  place  payable, 
enter  them  upon  the  proper  records  and  make  a  settlement 
or  proof  at  the  end  of  the  day.  In  a  large  bank  each  of  these 
operations  is  performed  by  a  different  man  or  group  of  clerks 
under  the  direction  of  the  receiving  teller,  who  is  head  of 
the  department.  It  may  be  that  he  himself  will  do  very 
little  if  any  of  the  detail  work.  He  becomes  the  manager. 
Frequently  we  find  a  department  within  a  department,  as  for 
example,  the  money  department  within  the  paying  teller's 
department. 

The  ordinary  departments,  classified  as  to  group,  may  be 
described  as  follows: 

Paying  Teller's  Department  (Teller):  Pays  or  certifies 
checks.  In  charge  of  the  signature  book  or  cards  bearing 
the  authorized  signatures  of  all  depositors.  Ships  currency. 
In  charge  of  the  vault  cash  and  reserves. 

Receiving  Teller's  Department  (Teller):  Receives  de- 
posits. Distributes  checks  to  bookkeepers  and  other  depart- 
ments. Prepares  exchanges  for  clearing  house.  Turns  cash 
over  to  the  paying  teller  at  end  of  day. 

24 


ELEMENTARY  BANKING 

Note  Teller's  Department  (Teller) :  Collects  notes  and 
drafts  due  at  the  bank  or  elsewhere  in  the  city.  Usually 
in  charge  of  the  runners  or  messenger  department,  which 
is  a  subdivision. 

Collection  Department  (Teller) :  Collects  notes,  drafts,  and 
other  "time"  items  when  payable  out  of  town.  Credits 
accounts  of  depositors  when  collections  are  advised  paid. 

Transit  Department  (Teller) :  This  is  a  subdivision  of  the 
receiving  teller's  department  and  may  be  known  by  other 
terms,  such  as  correspondence,  foreign  check,  miscellaneous 
check  or  country  check  department.  Assorts  checks  pay- 
able out  of  town,  endorses  them  and  lists  them  on  letters 
addressed  to  other  banks.  Gives  totals  of  outgoing  or  re- 
mittance letters  to  general  ledger  bookkeeper  at  end  of  day. 

Loan  or  Discount  Department  (Executive) :  Receives  notes 
submitted  for  discount  or  makes  loans.  Figures  discount 
and  interest.     Has  charge  of  collateral  securing  loans. 

Credit  Department  (Executive) :  Secures  and  collects  in- 
formation relating  to  borrowers.  Checks  statements  sub- 
mitted by  them.  In  charge  of  credit  files  which  contain 
information  as  to  the  reliability,  business  habits  and  finan- 
cial strength  of  borrowers. 

Analysis  or  Statistical  Department  (Executive):  Usually 
found  in  city  banks.  Analyzes  the  accounts  of  depositors 
to  determine  which  are  profitable  and  which  are  losing 
accounts.  Makes  monthly  reports  to  officers.  In  charge  of 
statistics  relating  to  the  bank's  accounts. 

Individual  Ledger  Department  (Bookkeepers) :  Keeps  the 
records  of  the  balances  of  individual  depositors.  May  be 
subdivided  as  to  kind  of  accounts  (savings,  dealers),  in 
addition  to  ordinary  alphabetical  division.  May  balance 
pass-books  or  there  may  be  a  separate  department  for  this 
purpose  using  the  statement  system.  Figures  interest 
on  accounts. 

25 


ELEMENTARY  BANKING 

General  Ledger  Department  (Bookkeepers):  Keeps  the 
general  or  control  accounts  of  the  bank.  Makes  up  the 
bank's  statement  of  condition. 

Country  Bank  Account  Department  (Bookkeepers) :  Con- 
fined to  city  banks.  Keeps  the  accounts  of  other  banks, 
usually  consisting  of  reserve  accounts. 

Auditor's  Department  (Executive):  Responsible  for  the 
settlement  of  the  various  departments.  Reconciles  the  ac- 
counts with  other  banks.     Certifies  interest  calculations. 

In  addition  to  these  departments,  there  are  others  to  be 
found  either  in  very  large  banks  or  even  in  small  banks 
operating  special  features.  Among  the  first  might  be  noted 
the  coupon  department,  exchange  department,  purchasing 
department,  filing  department,  interest  department,  new 
business  department,  etc.,  all  of  which  terms  are  self- 
explanatory.  Among  special  departments  may  be  mentioned 
the  bond  department,  safety  deposit  department,  special 
deposit  department  (securities  and  valuables  stored  with  the 
bank,  but  not  placed  in  private  boxes).  In  trust  companies 
there  is  the  trust  department  which  may  have  a  complete 
independent  organization  of  its  own,  with  officers,  book- 
keepers and  other  clerks.  This  department  has  charge  of 
the  trust  accounts.  All  these  various  departments  will  be 
explained  in  more  detail  in  separate  chapters. 


26 


Bank  Statements 


RESOURCES 

LIABILITIES 

Loans  and  Dis- 

Capital  

$100,000.00 

counts  $400,000.00 

Surplus 

70,000.00 

U.  S.   Bonds   to 

Undivided  Profits 

5,000.00 

Secure  Circu- 

Circulation  

75,000.00 

lation 

75,000.00 

Individual     De- 

Other Bonds  and 

posits 

350,000.00 

Securities  .  .  . 

25,000.00 

Certificates      o  f 

Due    from    Re- 

Deposit  

50,000.00 

serve  Agents. 

45,000.00 

Certified  Checks 

20,000.00 

Due  from   State 

Cashier's  Checks 

10,000.00 

Banks  

3,000.00 

Due  to  Banks.  . 

20,000.00 

Exchanges      for 

Clearing 

House 

2,000.00 

Banking  House. 

50,000.00 

Gold 

25,000.00 

Legal      Tender 

Notes 

15,000.00 

Silver  Certifi- 

cates  

40,000.00 

National      Bank 

Notes 

15,000.00 

Fractional 

5,000.00 

1 

$700,000.00 

5700,000.00 

A  good  way  to  understand  the  nature  of  banking  functions 
is  to  examine  a  bank  statement  and  study  the  various  items 
of  assets  and  liabilities.  Issuing  a  statement  of  condition 
is  not  left  to  the  discretion  of  the  bank;  it  is  required  by 
law.  The  national  bank  act  provides  that  national  banks 
shall  publish  their  statements  at  least  five  times  yearly,  on 

27 


ELEMENTARY  BANKING 

the  call  of  the  Comptroller  of  the  Currency.  It  may  be  said 
then,  that  banks  issue  their  statements  for  two  reasons; 
because  their  semi-public  nature  makes  it  legally  necessary, 
and  because  it  is  useful  as  an  advertisement.  Few  people, 
comparatively  speaking,  understand  how  to  read  a  statement 
so  that  much  of  the  value  is  lost  both  to  the  bank  and  to  the 
public.  Some  banks  are  beginning  to  explain  the  meaning 
and  force  of  the  statement  in  their  advertisements.  More 
should  do  so. 

For  the  purposes  of  illustration,  the  statement  of  a  national 
bank  may  be  said  to  be  typical,  since  it  includes  more  general 
items  than  the  figures  of  a  state  or  savings  bank.  All  bank 
statements  are  similar,  as  will  be  seen  by  reference  to  the 
forms  shown  on  page  22.  There  are  two  sides  to  a  state- 
ment: the  liabilities  show  what  the  bank  owes,  the  re- 
sources what  the  bank  owns,  or  rather  what  it  has 
wherewith  to  pay  its  debts. 

The  creditors  of  the  bank  may  be  divided  into  three 
groups:  (1)  the  stockholders,  (2)  the  depositors,  (3)  the 
general  public.  The  first  group  are  inclined  to  examine  the 
statement  to  determine  if  the  bank  is  earning  money,  the 
second  group  satisfy  themselves  that  the  bank  is  safe,  and 
the  third  group  look  to  the  government  for  protection  since 
they  have  no  voice  in  the  management  of  the  bank,  nor  any 
choice  in  accepting  their  relation  to  the  bank.  The  re- 
sources may  also  be  roughly  divided  into  three  kinds:  (l) 
loans  and  investments  having  a  fixed  maturity,  (2)  amounts 
due  from  other  banks  usually  payable  on  demand  or  subject 
to  draft,  (3)  actual  money  or  cash.  There  is  also  the  bank 
building  and  with  this  item  there  is  included  the  amount 
of  money  representing  the  vault,  furniture  and  fixtures. 

These  various  items  all  bear  relation  to  each  other,  and 
the  trained  observer  is  able  to  base  an  intelligent  opinion 
on  the  condition  of  the  bank  and  the  sagacity  of  its  officers 

28 


ELEMENTARY  BANKING 

by  a  study  of  the  proportion  of  one  figure  to  another.  A 
complete  analysis,  however,  is  not  possible  except  by  com- 
paring a  series  of  statements  covering  a  long  period.  This 
enables  one  to  tell  if  the  bank  is  growing  or  doing  a  profit- 
able business. 

The  first  liability  item  of  importance  is  the  capital.  This 
should  be  large  enough  to  give  strength  to  the  bank  and 
enable  the  institution  to  accommodate  the  needs  of  its 
customers.  Many  transactions  are  by  law  based  on  the 
amount  of  capital.  For  example,  national  banks  can  loan 
no  more  than  10%  of  the  capital  and  surplus  to  one  individ- 
ual or  interest,  and  no  matter  how  large  the  surplus  may  be, 
no  single  loan  larger  than  30%  of  the  capital  can  be  made. 
Members  of  the  Federal  reserve  system  are  required  to 
subscribe  6%  of  their  capital  and  surplus  to  the  capital 
stock  of  the  Federal  Reserve  Bank  of  their  district.  The 
total  amount  of  mortgage  loans  is  also  restricted  to  a  cer- 
tain proportion  of  capital.  Banks  try  to  sell  their  stock  as 
widely  as  possible  because  if  it  is  held  by  a  great  number 
of  people,  more  business  is  attracted  to  the  bank  and  it  is 
hard  for  anyone  to  get  possession  of  the  greater  part  of  the 
stock  and  thus  control  the  bank. 

The  surplus  also  belongs  to  the  stockholders.  This  fund 
represents  earnings  that  are  set  aside  to  give  added  strength. 
If  "bad  loans"  are  made,  the  loss  may  be  charged  to  the 
surplus  fund,  thus  securing  the  depositors.  National  banks 
are  required  to  set  aside  10%  of  net  earnings  as  a  surplus 
fund  until  such  fund  shall  amount  to  20%  of  the  capital 
before  a  dividend  may  be  declared. 

Deposits  are  of  several  kinds.  The  term  "individual 
deposits"  is,  by  custom,  applied  to  deposits  that  are  subject 
to  check,  that  is,  payable  on  the  order  of  the  depositor 
this  order  being  written  on  an  instrument  called  a  "check." 
Savings,  or  time,  deposits  are  also  due  to  individuals,  but 

29 


ELEMENTARY  BANKING 

not  subject  to  check,  that  is,  the  bank  may  require  notice 
of  withdrawal  to  be  given.  Certificates  of  deposits  are 
written  acknowledgments  made  by  the  bank  that  a  deposit 
has  been  made  and  the  bank  will  pay  the  amount  named 
upon  presentation  of  the  certificate  properly  receipted  on 
the  back,  or  endorsed.  Certificates  of  deposit  may  be 
payable  either  at  sight  or  on  a  given  date,  and  are  known 
as  demand  or  time  certificates  respectively.  Deposits  made 
by  one  bank  in  another  are  sometimes  called  bank  deposits, 
but  such  accounts  are  officially  reported  as  "due  to  banks." 
There  are  no  restrictions  as  to  the  amount  of  deposits  a 
bank  may  receive  nor  need  they  be  limited  by  the  amount 
of  capital  stock.  It  has  been  set  down  as  a  good  banking 
principle,  however,  that  the  capital  and  surplus  of  a  com- 
mercial bank  should  approximate  10%  of  the  total  deposits. 
This,  however,  is  a  statement  of  opinion,  rather  than  of  fact. 

Certified  checks  and  cashiers'  checks  are  used  when  the 
holder  or  the  maker  of  a  check  wishes  to  exchange  his 
credit,  which  may  have  only  a  local  value,  with  the 
credit  of  the  bank,  which  has  a  general  value.  That  is,  the 
account  of  the  depositor  is  charged  the  amount  of  the  check, 
which  then  becomes  a  liability  upon  the  bank,  payable 
when  properly  endorsed.  Note  that  the  deposit  obligation 
has  not  been  discharged  so  far  as  the  bank  is  concerned 
until  the  check  is  paid,  hence  in  calculating  reserve,  cer- 
tified checks  and  cashiers'  checks  are  included  as  a  part 
of  the  deposits.  Except  that  they  are  payable  to  a  named 
payee,  they  are  practically  the  same  as  bank  notes  which 
are  payable  to  bearer — they  are  obligations  of  the  bank 
due  the  general  public. 

The  circulation  item,  meaning  the  notes  of  the  bank  for 
use  as  money,  is  to  be  found  only  in  the  statement  of  the 
national  bank,  and  in  course  of  time  all  bank  note  issue 
will  be  the  exclusive  function  of  the  Federal  reserve  banks. 

30 


ELEMENTARY  BANKING 

These  notes  are  secured  by  collateral,  that  is,  the  public 
is  secured  against  loss  in  the  event  of  the  failure  of  the 
bank,  by  a  deposit  of  bonds  placed  with  the  Treasurer  of 
the  United  States.  This  is  called  the  currency  principle 
of  note  issue.  Nearly  all  other  countries  use  bank  notes 
issued  under  the  banking  principle,  in  which  no  collateral 
is  put  up  and  the  notes  are  secured  by  the  general  assets 
of  the  bank.  This  is  the  more  scientific  principle,  since  the 
needs  of  trade,  rather  than  the  scarcity  or  abundance  of 
bonds  or  other  collateral  security  governs  the  elasticity  of 
the  issue. 

Turning  to  the  assets  or  resources  of  the  bank,  the  first 
classification  of  items  consists  of  the  investments.  These 
vary  as  to  kind  and  ratio  to  the  other  figures  of  the  state- 
ment as  between  different  kinds  of  banks.  They  will  also 
vary  in  the  same  kind  of  banks  but  located  in  different 
sections  of  the  country.  The  commercial  bank  must  keep 
its  assets  liquid;  that  is,  constantly  turning  or  moving 
because  its  depositors  are  making  active  use  of  their  funds 
at  all  times.  Loans  and  discounts,  the  largest  investment 
item  of  the  commercial  bank,  have  fixed  maturities  and, 
therefore,  the  bank  also  buys  bonds  because  they  can  be 
readily  sold  and  converted  into  money  in  case  of  need. 
Bonds  are  sometimes  called  "secondary  reserve"  for  this 
reason.  Until  the  passage  of  the  Federal  Reserve  Act, 
national  banks  were  compelled  to  invest  a  certain  propor- 
tion of  their  capital  in  government  bonds.  This  provision 
grew  out  of  the  necessities  imposed  by  the  Civil  War.  At 
that  time  the  credit  of  the  government  was  at  a  low  ebb 
and  purchasers  for  bonds  could  not  be  found. 

It  is  not  amiss  to  pause  a  moment  and  take  note  of  the 
scars  that  have  been  left  upon  our  national  life  by  the  four 
years'  war  between  the  states.  On  the  map  there  is  the 
state  of  West  Virginia;  in  every  town  and  city,  North  and 

31 


ELEMENTARY  BANKING 

South,  are  noble  monuments  to  commemorate  the  deeds 
of  brave  men;  in  the  pages  of  history  will  live  forever  in 
solemn  grandeur  the  figure  of  Abraham  Lincoln;  in  the 
world  of  music  there  are  the  stirring  strains  of  a  hundred 
songs  and  battle  hymns;  and,  coming  down  to  the  more 
sordid  affairs  of  men,  in  our  banking  and  currency  systems 
we  have  the  justly  deplored  "greenback,"  or  U.  S.  note, 
which  was  forced  into  circulation  at  the  time  of  the  war, 
and  the  national  banking  system. 

Before  leaving  this  momentary  digression,  it  is  well  to 
call  the  attention  of  the  student  to  the  experiences  met 
with  in  connection  with  the  issue  of  "greenbacks,"  or  fiat 
money.  When  Congress  first  authorized  their  issue  in 
1862,  to  be  used  as  money,  they  caused  gold  to  go  to  a 
premium.  It  required  at  one  time  $258  of  greenbacks  to 
secure  $100  of  gold.  They  did  not  possess  the  qualities 
that  good  money  must  have,  and  it  was  not  until  the  policy 
was  adopted  by  the  government  of  redeeming  them  in  gold 
on  demand  that  they  approached  par  value.  They  illus- 
trate the  fact  that  man-made  laws  cannot  upset  economic 
laws  any  more  than  water  can  be  made  to  run  up  hill  by 
an  act  of  legislation. 

In  some  states  trust  companies  are  prohibited  from  dis- 
counting, that  is,  loaning  money  on  promissory  notes.  This 
law  is  evaded  by  "purchasing"  the  notes  outright,  a  dis- 
tinction in  law  but  with  little  difference  in  actual  practice. 
Both  trust  companies  and  savings  banks  invest  largely  in 
bonds  and  mortgages.  They  are  able  to  loan  their  money 
in  this  way  because  trust  funds  and  savings  deposits  are 
not  constantly  turning;  they  are  of  the  nature  of  long-time 
investments.  Many  states  have  laws  which  prescribe  cer- 
tain limitations  governing  the  purchase  of  bonds.  In  such 
states  bond  issues  are  advertised  as  "legal  investments" 
for  savings  banks  and  trust  funds.    In  other  words,  the 

32 


ELEMENTARY  BANKING 

state  protects  the  depositors  by  permitting  their  money  to 
be  loaned  only  in  the  safest  securities.  Good  banking 
principles  require  that  all  banks  should  so  loan  or  invest 
their  funds  that  the  loans  are  of  different  kinds  and  matur- 
ities follow  each  other  regularly.  If  stress  should  occur, 
if  an  unusual  number  of  depositors  want  their  money,  the 
bank  will  have  loans  coming  due  to  meet  the  demands,  and 
if  these  funds  are  not  sufficient  the  bank  can  fall  back  on 
its  "secondary  reserve,"  that  is,  sell  its  bonds,  which,  if 
they  are  first  class,  will  command  a  ready  market. 

The  items  "due  from  banks,"  "checks  and  cash  items," 
"exchanges  for  the  clearing  house,"  are  amounts  due  by 
other  banks  and  are  payable  on  demand.  They  may  repre- 
sent two  different  kinds  of  accounts,  however.  Amounts 
due  from  other  banks  may  be  checks  in  process  of  collection, 
that  is,  checks  payable  at  other  banks  either  in  the  city  or 
elsewhere,  which  have  been  sent  out  for  collection,  or  they 
may  represent  funds  which  have  been  collected,  but  which 
are  on  deposit  with  another  bank — known  as  a  "reserve 
agent" — and  are  subject  to  draft. 

The  cash  items,  actual  money,  usually  classified  as  to 
kinds,  are  self-explanatory.  This  is  the  "till  money"  of 
the  bank  to  care  for  currency  needs.  It  is  also  the  bank's 
reserve  and  it  is  based  by  law  upon  the  amount  of  net  (i.  e., 
collected)  deposits.  The  percentage  of  reserve  required 
varies  with  the  kind  of  bank,  this  being  a  natural  result  of 
the  fact  that  one  kind  of  bank  will  not  have  the  same  de- 
mands as  another.  This  money  represents  the  uninvested 
portion  of  the  bank's  funds. 

The  building,  furniture  and  fixtures  are  carried  as  a 
resource,  usually  at  a  figure  less  than  their  actual  cost. 
This  is  done  not  only  as  a  margin  of  safety,  but  also  because 
few  banks  would  be  able  to  sell  their  property  at  short 
notice  for  its  full  value.     This  item  should,  therefore,  be 

33 


ELEMENTARY  BANKING 

given  close  scrutiny  in  determining  the  strength  of  the 
bank.  Sometimes  very  strong  banks  "charge  the  item 
off"  entirely  out  of  surplus  on  the  other  side  of  the  state- 
ment.    Others  do  not  own  their  buildings,  but  pay  rent. 

With  this  explanation  of  the  various  items,  we  can  now 
use  an  outline  of  our  bank  statement  to  show  how  the  insti- 
tution "works." 


ASSETS 

LIABILITIES 

Loans $400,000.00 

Bonds 100,000.00 

Due  from  banks      50,000.00 
Banking  house.       50,000.00 
Cash 100,000.00 

Capital $100,000.00 

Surplus 75,000.00 

Circulation.  .  .  .       75,000.00 
Deposits 450,000.00 

$700,000.00 

$700,000.00 

Assuming  that  the  bank  has  started  with  capital  fully 
paid  in  and  with  some  deposits,  a  building  is  secured,  a  few 
loans  made,  bonds  purchased  and  the  proper  proportion  of 
cash  or  reserve  is  placed  in  the  vaults.  Accounts  are 
opened  with  other  banks,  a  part  of  the  earnings  is  set  aside 
in  the  surplus  fund  and  the  bank  finally  grows  to  the  dimen- 
sions shown  in  the  statement.  Now  let  us  reverse  the 
process,  and  see  what  happens  if  a  panic  should  occur  or 
the  depositors  want  their  money.  We  must  keep  in  mind 
the  fact  that  both  sides  of  the  statement  are  always  equal. 
As  the  deposits  begin  to  fall,  the  cash  is  the  first  resource 
available  to  meet  the  drain.  Then  the  amount  due  from 
banks  is  called  upon  and  other  institutions  pay  this  amount 
with  cash  which  helps  to  keep  the  bank  going.    Loans  are 

34 


ELEMENTARY  BANKING 

falling  due,  and  as  they  are  paid  this  money  also  goes  to 
the  depositors.  Then  perhaps  the  bonds  are  sold  and  so 
until  all  the  resources  are  realized  upon  and  the  depositors 
are  paid  off.  In  actual  practice,  however,  when  trouble 
starts,  all  the  depositors  want  their  money  at  the  same  time 
and  they  want  it  right  away.  They  do  not  know  that  basis- 
of-credit  money  or  deposits  cannot  be  converted  into  medium- 
of-exchange  money  at  short  notice.  When  this  situation 
arises,  banks  are  compelled  to  suspend  specie  payments 
because  there  is  not  enough  specie  to  go  around.  Making 
use  of  the  note  issue  function,  the  bank  would  pay  the  de- 
positors with  its  own  notes  or  promises  to  pay  which  cir- 
culate as  money.  Now  we  see  why  note  issue  is  such  an 
important  matter.  Bank  notes  to  be  useful,  as  money, 
must  enjoy  the  confidence  of  the  people  or  they  will  not  be 
accepted.  Now  let  us  apply  the  Federal  Reserve  Act  to 
our  bank  statement.  Under  this  Act  the  bank,  instead  of 
being  obliged  to  suspend  payment  to  its  depositors,  can 
take  a  part  of  its  loans  and  discounts  to  the  Federal  Reserve 
Bank  and  the  Reserve  Bank  will  give  its  own  notes  in  pay- 
ment. In  the  statement  this  reduces  the  bank's  loans  and 
increases  its  cash.  The  public,  knowing  that  these  great 
banks  must  keep  a  large  gold  reserve,  will  accept  the  notes 
and  the  panic  or  demand  for  money  slowly  subsides.  The 
scare  being  over,  and  having  no  use  for  the  money  as  a 
medium  of  exchange,  the  people  redeposit  it  in  the  banks, 
the  banks  deposit  the  Federal  reserve  notes  in  the  reserve 
banks  and  they  are  then  cancelled  and  retired  from 
circulation. 

Let  us  suppose  our  bank  has  made  some  "bad  loans'* 
that  are  not  paid  when  due.  This  reduces  the  assets  so 
that  they  will  not  equal  the  liabilities.  What  happens? 
The  bank  reduces  the  surplus  fund  the  same  amount  so 
that  there  is  no  loss  to  the  depositors.    If,  however,  the 

35 


ELEMENTARY  BANKING 

bad  loans  are  larger  than  the  surplus,  the  bank  will  be 
closed  by  the  Banking  Department  or  the  Comptroller  of 
the  Currency,  and  the  stockholders  are  then  liable  for  an 
assessment  equal  to  the  amount  of  stock  they  hold  to  make 
up  the  loss. 


36 


Bank  Accounting 


Bank  accounting  consists  in  making  written,  permanent 
records  of  every  transaction.  Every  penny  must  be  ac- 
counted for.  The  statement  of  the  bank,  which  we  have 
just  discussed,  shows  the  general,  or  control,  accounts  of 
the  bank,  and  the  various  books  of  the  bank  show  the  detail 
of  these  items.  It  would  not  be  impossible,  but  it  would 
be  entirely  impractical,  to  enter  every  figure  directly  on  the 
statement  of  condition.  We  might  imagine  an  enormous 
sheet  on  which  the  capital  is  entered  as  to  the  ownership 
of  each  share  of  stock.  Instead  of  total  deposits,  the  bal- 
ance of  each  depositor  would  appear  opposite  his  name. 
On  the  other  side,  instead  of  loans  and  discounts,  there 
would  be  an  itemized  list  of  the  loans  with  the  names  of 
the  borrowers.  With  such  a  sheet  spread  out  over  a  floor 
space  of  great  area,  we  might  imagine  the  clerks  crawling 
up  and  down  the  columns  like  flies  making  debits  and 
credits.  This  is,  of  course,  absurd,  but  it  is  precisely  what 
happens,  except  that  the  entries  are  made  on  books,  loose 
leaves  or  cards,  and  the  final  results  are  posted  on  the 
statement  of  condition  which  is  thus  altered  day  by  day. 

As  in  other  matters  we  have  mentioned,  banks  are  also 
alike  with  respect  to  bank  accounting,  the  same  principles 
govern  whether  the  bank  is  large  or  small,  national  bank 
or  trust  company.  All  the  books  are  a  part  of  the  general 
books,  and  the  extent  to  which  they  are  divided  depends 
on  the  size  of  the  bank.  Division  is  made  to  fit  the  capacity 
of  the  clerk.  When  any  part  of  the  work  becomes  too  bur- 
densome for  one  man,  he  may  be  given  an  assistant  or  the 
books  and  records  will  be  further  divided,  so  that  two  men 
can  do  the  same  thing  without  conflicting.  In  very  large 
banks  a  clerk  may  spend  all  his  time  listing  checks  upon 
a  sheet,  or  adding  up  certain  columns  of  figures  or  doing 

37 


ELEMENTARY  BANKING 

any  one  of  a  thousand  things  that  must  be  done  in  the 
process  of  keeping  accounts.  Unless  he  is  studious  and 
observant,  he  loses  sight  of  the  fact  that  his  work  is  a  part 
of  the  whole,  he  becomes  mechanical,  falls  into  a  rut  and 
banking,  instead  of  being  an  interesting  employment  full  of 
possibilities,  is  to  him  mere  drudgery.  He  is  standing  so 
close  to  the  machinery  that  he  allows  it  to  master  him 
instead  of  broadening  his  vision  by  study  and  thus  master- 
ing his  task. 

The  first  principle  in  bank  accounting,  as  in  all  other 
bookkeeping,  is  that  for  every  debit  there  must  be  a  credit, 
and  vice-versa.  In  accordance  with  this  fundamental 
theory  the  books  must  always  be  in  balance.  As  we  have 
seen  with  respect  to  the  statement,  every  dollar  of  liabilities 
is  accounted  for  by  another  dollar  of  resources.  This  is 
true  of  every  bank.  If  the  institution  is  large  enough  to 
be  divided  into  departments,  such  departments  are  charged 
with  all  funds  passing  through  their  hands,  and  they  must 
show  on  their  records  what  has  become  of  every  penny. 
Similarly  each  clerk,  bookkeeper  or  teller  accounts  at  the 
end  of  the  day  for  each  item  of  cash  he  has  handled.  When 
he  has  done  so  he  is  said  to  have  * 'settled,"  "balanced"  or 
"struck  a  proof."  Every  bank  clerk  has  had  the  experi- 
ence of  remaining  at  his  desk  until  a  late  hour  at  night 
checking  up  his  day's  work  searching  for  a  difference  of  a 
few  cents.  Often  he  becomes  embittered  at  what  seems 
to  him  a  tyranny  when  the  small  sum  of  money  involved 
is  considered.  The  reason  he  must  settle,  however,  is  not 
on  account  of  the  possible  loss  of  ten  cents,  but  because  the 
most  important  principle  in  bank  accounting  is  involved. 
"Accuracy  first"  is  a  motto  that  should  be  framed,  figura- 
tively at  least,  upon  the  wall  of  every  banking  room. 

The  books  used  by  a  bank  are  of  various  kinds  and  then- 
purpose  is  indicated  by  name.    A  ledger  is  a  book  used  to 

38 


ELEMENTARY  BANKING 

keep  a  record  of  balances.  To  "post"  means  to  enter  in 
the  proper  columns  either  the  debits  or  credits  on  the  ledger, 
and  the  difference  between  them  represents  the  balance 
either  due  by  or  to  the  bank.  Most  banks  are  doing  away 
with  bound  books,  especially  ledgers,  and  substituting 
cards  or  loose  leaves.  This  plan  enables  several  men  to 
work  on  the  same  records,  which  would  be  impossible  if  they 
were  bound  in  a  single  book.  Alphabetical  division  is  also 
easier  of  adjustment  and  "inactive"  accounts  can  be  readily 
separated  from  "active"  accounts.  Totals  of  balances  can 
be  listed  upon  adding  machines  for  proof  more  easily  from 
loose  sheets  than  from  bound  books.  But  whether  bound 
or  not,  records  of  balances  are  kept  upon  ledgers. 

A  journal  is  a  book  in  which  daily  transactions  are  listed 
in  regular  order  as  to  accounts,  and  the  total  debit  or  credit 
is  then  posted  on  the  ledgers.  Journals,  too,  may  be  loose 
sheets  so  that  they  can  be  inserted  in  the  carriage  of  an 
adding  machine;  indeed,  machines  have  been  invented 
upon  which  both  debits  and  credits  may  be  written  and  the 
machine  will  automatically  subtract  or  add  and  print  the 
new  balance.  The  journal,  then,  is  merely  a  subdivision 
of  the  ledger. 

A  depositor  of  the  bank  wishes  his  account  to  be  charged 
and  the  money  paid  to  a  named  payee.  The  piece  of  paper 
upon  which  he  writes  this  order  is  a  "check."  If  he  de- 
posits money,  he  writes  the  memorandum  of  the  amount 
upon  a  ruled  slip  of  paper  and  this  is  the  "deposit  ticket." 
Bookkeepers  enter  debit  and  credit  records  upon  their 
journals  directly  from  these  items.  Money,  however,  may 
change  hands  or  from  one  account  to  another,  in  other  ways; 
by  letter,  telegram  or  other  debit  and  credit  advice.  In 
such  cases  a  "charge  ticket"  or  "credit  slip,"  as  the  case 
may  be,  is  signed  or  initialed  by  an  officer  of  the  bank,  and 
entry  with  full  explanation  is  made  upon  a  book  from  which 

39 


ELEMENTARY  BANKING 

record  the  bookkeeper  makes  his  entries.  This  book  is 
known  as  a  "scratcher,"  "tickler"  or  a  "blotter."  The 
terms  mean  practically  the  same  thing.  A  book  upon  which 
a  complete  description  of  a  negotiable  instrument  or  trans- 
action is  made  for  a  permanent  record  or  for  reference,  is 
called  a  register.  For  example,  bond  register,  collection 
register,  etc. 

All  other  books,  cards,  sheets  of  whatever  nature  are  a 
part  or  subdivisions  of  these  books.  Often  they  become 
known  among  the  clerks  by  some  other  name  descriptive 
of  their  general  appearance.  For  instance,  the  general 
ledger  scratcher  in  one  bank  is  known  as  the  "red  book," 
while  the  collection  department  scratcher  is  the  "black 
book."  These  names  have  stuck  through  generations  of 
clerks,  and  a  young  man  going  into  another  bank  has  been 
known  to  ask  for  the  "black  book,"  and  being  untrained 
in  accounting,  he  had  difficulty  in  making  himself  under- 
stood. Similarly,  in  New  York  City  banks  the  pigeon- 
holed desk  where  checks  are  assorted  for  the  clearing 
house  is  generally  known  as  the  "clearing  house  rack." 
A  New  York  bank  clerk  visiting  a  Philadelphia  institution  and 
asking  to  see  the  "rack"  would  probably  be  shown  a  hat  room. 

The  records  made  by  one  clerk  upon  one  set  of  books,  in 
a  well-appointed  accounting  system,  go  to  check  the  records 
of  another  clerk  upon  a  different  set  of  books.  For  in- 
stance, the  paying  teller  and  the  receiving  teller  will  each 
keep  a  record  of  checks  cashed  or  deposited  payable  within 
the  bank.  The  debit  postings  of  the  individual  bookkeeper 
would  agree  with  the  teller's  figures.  Skillful  accounting 
lies  in  making  the  fullest  possible  use  of  original  entries, 
at  the  same  time  having  a  check  on  all  figures  to  guard 
against  either  error  or  fraud.  Many  young  bank  men  have 
materially  increased  their  salaries  and  rate  of  promotion  by 
devising  improved  accounting  methods. 

40 


ELEMENTARY   BANKING 

As  has  been  said,  every  transaction  ultimately  affects  the 
bank's  statement  of  condition  by  debit  or  credit.  Refer 
again  to  the  outline  statement  shown  in  the  preceding 
chapter.  A  deposit  of  $1,000.00  is  made,  consisting  of 
$200.00  cash,  and  checks  as  follows:  $200.00  on  the  bank 
itself  and  $600.00  payable  in  another  city.  At  the  end  of 
the  day  (assuming  this  to  be  the  only  deposit),  on  the  lia- 
bilities side  there  is  an  increase  of  $800.00,  all  of  which 
appears  in  the  item  "deposits'*  being  the  total  $1,000.00, 
less  the  check  for  $200.00  which  is  charged  to  the  account 
of  the  drawer.  On  the  resource  side,  then,  we  must  have 
a  corresponding  increase  of  $800.00,  and  this  is  made  up 
by  an  increase  in  the  cash  of  $200.00  and  an  increase  of 
$600.00  in  the  item  "due  from  banks."  Or  a  transaction 
may  appear  on  one  side  of  the  statement  only.  The  bank 
has  sold  $5,000.00  of  the  bonds  it  owns.  The  bond  item 
of  resources  would  show  a  reduction  of  this  amount,  and 
either  "cash"  or  "due  from  banks"  would  be  increased, 
depending  whether  payment  was  made  in  cash  or  by  check. 
If  payment  for  the  bonds  is  made  with  a  check  on  the  bank 
itself,  both  sides  of  the  statement  are  affected,  a  corre- 
sponding reduction  in  deposits  taking  place.  How  these 
various  transactions  are  recorded  will  be  discussed  in  more 
detail  in  the  following  chapters. 


41 


Receiving  Teller 


A  bank  teller  is  a  senior  clerk  who  deals  with  the  bank's 
customers — chiefly  depositors — in  daily  transactions  across 
his  counter.  In  very  small  banks  one  man  will  act  both 
as  receiving  teller  and  paying  teller,  as  well  as  note  teller 
and  collection  teller;  he  is  the  Teller,  and  he  may  be  an 
official  as  well.  In  many  large  banks,  particularly  in  the 
west,  an  arbitrary  alphabetical  division  is  made  of  the 
accounts  of  the  bank  and  each  group  is  treated  as  a  sep- 
arate unit.  Under  this  plan,  it  is  as  if  there  were  several 
small  banks  operating  under  one  roof.  Each  teller  acts  as 
both  paying  and  receiving  teller  for  his  own  group,  to  which 
bookkeepers  are  also  assigned.  This  plan  has  several 
advantages.  The  depositors  are  not  often  held  up  in  a 
single  long  line  on  busy  days;  the  teller  is  not  put  to  the 
strain  of  knowing  the  faces  and  signatures  of  all  the  deposi- 
tors; the  money  can  be  handled  more  easily  and  if  differ- 
ences should  occur  they  are  confined  within  limits. 

But,  as  has  been  stated,  the  duty  goes  with  the  office 
rather  than  with  the  man,  and  whether  the  bank  employs 
a  separate  receiving  teller  or  not,  there  are  certain  duties 
and  responsibilities  peculiar  to  the  position.  Therefore,  in 
this  chapter,  as  in  those  following,  we  will  assume,  for  con- 
venience of  illustration,  that  a  separate  employee  is  assigned 
to  each  of  the  desks  or  departments  thus  described. 

The  principal  business  of  the  receiving  teller  is  to  receive 
deposits.  Responsibility  of  no  mean  order  rests  upon  the 
teller,  because  he  acts  as  the  agent  of  'the  bank  in  the  rela- 
tion established  between  the  depositor  and  the  institution. 
He  must  be  on  his  guard  at  all  times.  His  first  care  is  to 
assure  himself  that  the  deposit  is  intended  for  his  bank. 
Many  people  have  two  or  more  bank  accounts  and  some- 
times confuse  the  pass-books.    The  amount  of  the  deposit 

42 


ELEMENTARY  BANKING 

is  entered  in  the  pass-book  as  a  receipt.  In  a  savings  bank 
the  pass-book  is  more  than  a  receipt:  it  is  a  voucher  or 
evidence  of  contract  between  the  bank  and  the  depositor. 

If  the  bank  is  one  that  deals  with  a  large  number  of 
depositors  who  make  deposits  of  any  size  or  quantity  of 
checks,  the  teller  will  merely  satisfy  himself  that  the  checks 
are  endorsed  by  the  bank's  customer,  enter  the  amount  in 
the  pass-book  and  examine  or  prove  the  ticket  later.  This 
prevents  a  long  line  of  depositors  from  becoming  impatient 
of  delay.  If  errors  are  found  they  are  reported  by  tele- 
phone, and  since  the  bank  will  have  been  careful  in  the 
first  place  as  to  whom  it  accepts  as  depositors,  there  is  but 
slight  risk  that  an  error  may  not  be  satisfactorily  adjusted 
at  the  end  of  the  day,  without  loss  to  the  bank.  But  whether 
it  is  done  first  or  last,  by  the  teller  himself  or  by  his  assist- 
ants, each  deposit  is  subjected  to  the  same  process  of 
proving.  The  cash  is  counted  and  care  taken  that  there 
are  no  counterfeit  bills  or  coins  included.  The  checks  are 
examined  to  see  that  they  are  properly  listed  and  endorsed. 
In  cities  where  the  banks  charge  their  customers  exchange 
on  out-of-town  checks,  the  receiving  teller  sees  to  it  that 
the  proper  amount  of  exchange  is  deducted.  As  for  checks 
on  his  own  bank  that  may  be  deposited,  the  receiving  teller 
is  governed  by  the  same  rules  that  apply  to  the  paying 
teller,  that  is,  he  must  know  the  signature  and  also  be  cer- 
tain that  the  check  is  "good,"  etc.  Finally,  he  proves  or 
tests  the  addition  of  the  ticket.  The  total  is  listed  on  his 
blotter  or  scratcher  and  the  ticket  is  then  given  to  the 
bookkeeper. 

The  various  items  that  make  up  the  deposit  are  then 
ready  for  distribution.  The  checks  on  the  bank  itself  go 
to  the  bookkeepers;  checks  on  other  banks  in  the  same 
town  go  either  to  the  clerks  making  up  the  exchanges  for 
the  clearing  house  or  to  the  runners,  or  messengers'  de- 

43 


ELEMENTARY  BANKING 

partment  for  presentation.  Out-of-town  checks  go  to  the 
* 'transit  department,"  where  they  are  assorted  as  to  place 
payable  and  forwarded  for  collection  and  returns.  If  the 
bank  is  small,  the  receiving  teller  may  handle  all  these 
various  checks  in  his  own  department,  but  ordinarily  they 
will  be  distributed  to  other  departments  which  are  really 
subdivisions  of  the  receiving  teller's  department.  The  most 
important  of  these  departments  in  point  of  size  and  re- 
sponsibility is  the  transit  department. 

We  will  describe  such  a  department  in  a  city  bank.  It 
so  happens  that  out-of-town,  or  "country  checks,"  can  be 
handled  and  collected  more  economically  in  quantities, 
hence  country  banks  and  many  city  trust  and  savings  insti- 
tutions send  these  items  to  a  city  commercial  bank  which 
may  make  a  specialty  of  collecting  them.  The  receiving 
teller,  theoretically  at  least,  will  receive  these  items  through 
the  mail,  although  when  so  deposited  they  actually  do  not 
leave  the  hands  of  the  transit  clerks  who  open  and  prove 
the  incoming  remittances  or  deposits.  The  teller  adds  the 
figures  of  the  mail  deposits  to  those  of  counter  or  "window" 
deposits.  The  transit  clerks  assort  the  checks  geographic- 
ally, placing  together  checks  that  are  payable  in  the  same 
part  of  the  state  or  country.  They  are  then  endorsed  with 
the  bank's  stamp  and  listed  on  letters  addressed  to  the 
bank's  correspondents.  At  the  end  of  the  day  the  totals  of 
the  outgoing  letters  must  equal  the  total  of  the  checks  which 
are  charged  to  the  transit  department  by  the  receiving 
teller.  The  bookkeeper  charges  the  total  of  each  individual 
outgoing  letter  to  the  bank  to  whom  sent,  and  the  grand 
total  increases  the  general  ledger  item  "due  from  banks" 
by  that  amount. 

The  receiving  teller's  settlement  is  quite  simple.  He 
begins  the  day  without  any  funds.  As  deposits  come  in 
he  lists  them,  as  to  totals  on  a  scratcher,  writing  the  name 

44 


ELEMENTARY  BANKING 

of  the  depositor  opposite  the  amount.  At  the  end  of  the 
day  the  totals  of  the  checks  he  has  received  and  charged 
to  the  different  departments  of  the  bank  according  to  place 
of  payment,  plus  the  cash  he  holds,  must  equal  the  total 
deposits  for  that  day.  Settlement  being  made,  he  then 
turns  his  cash  over  to  the  paying  teller,  who  usually  does 
not  count  it  until  the  next  morning.  In  many  banks  the 
receiving  teller  acts  as  the  "clearing  house"  for  the  other 
departments.  For  instance,  checks  on  other  institutions 
will  be  cashed  by  the  paying  teller,  or  given  to  the  note 
teller  in  payment  of  notes,  or  paid  to  the  loan  clerk  for 
loans,  or  the  bank's  draft  on  another  city  may  be  bought 
with  a  personal  check.  All  these  departments  may  give 
over  such  receipts  to  the  receiving  teller  who  adds  the 
totals  to  his  individual  deposits  in  making  his  settlement. 
Charge  and  credit  tickets  would  be  handled  similarly.  The 
student  should  keep  it  clear  that  such  work  is  incidental 
to  the  business,  and  it  does  not  follow  that  because  it  may 
be  the  note  teller,  paying  teller  or  some  other  clerk  who 
does  this  internal  accounting  for  various  kinds  of  receipts, 
that  his  bank  is  * 'different." 

The  general  adoption  of  the  "batch"  or  "block"  system 
has  been  a  boon  to  the  accounting  done  by  the  receiving 
teller,  and  this  plan  is  now  in  operation  in  all  modern  banks. 
Under  this  system  the  correctness  of  the  deposit  ticket  is 
not  tested  as  to  listing  or  addition  when  received.  Instead, 
the  ticket  is  handed  to  an  assistant,  who  assorts  the  items 
in  groups,  for  example,  self-checks,  clearing  house  checks, 
non-clearing  local  checks,  out-of-town  checks  and  money. 
Further  division  may  be  made  of  any  of  these  groups  if  the 
size  of  the  bank  warrants.  The  items  are  then  listed  on 
an  adding  machine  in  parallel  columns,  each  of  which  is 
headed  by  the  name  of  the  department  which  will  receive 
the  checks.     The  totals  are  then  "picked  up"  or  recapitu- 

45 


ELEMENTARY   BANKING 


lated,  and  must  agree  with  the  total  of  the  ticket  which  is 
listed  in  another  column  on  the  sheet  and  the  name  of  the 
depositor  added  opposite.  If  the  deposits  are  small,  several 
are  combined  on  one  sheet.  At  the  end  of  the  day  a  total 
is  made  of  each  column  on  all  the  sheets,  or  "blocks,"  and 
these  being  recapitulated  must  equal  the  total  deposits 
which  is  the  teller's  proof.  The  advantages  of  this  plan 
are  many.  No  effort  or  time  is  lost  in  the  original  proof 
of  the  ticket.  As  the  items  are  listed  in  separate  columns, 
a  total  is  arrived  at  which  not  only  proves  the  ticket,  but 
gives  separate  totals  which  other  departments  use  to  prove 
their  own  work  against.  If  differences  occur,  they  are 
segregated  into  groups  and  thus  can  be  more  easily  located. 

TYPICAL  DISTRIBUTION  SHEET  USED  IN  THE 
BLOCK  SYSTEM 


Country  Checks 

City  Checks 

Checks  on 
this  bank 

Cash 

$162.29 

15.27 

222.12 

83.33 

1,000.00 

$29.16 

4.22 

.87 

926.12 

$110.28 

92.15 

47.16 

523.06 

10.00 

$116.22 

$960.37 

$1,483.01 

$782.65 

Recapitulation 

Deposits 

Depositors 

$1,483.01 
960.37 
782.65 
116.22 

$1,826.10 

4.22 

1,511.93 

Smith  &  Co. 
John  Doe 
S.  Williams 

$3,342.25 

$3,342.25 

46 


Paying  Teller 


The  paying  tellers  duties  are  the  direct  opposite  of  the 
receiving  teller's.  It  is  often  said  that  the  paying  teller 
has  the  most  important  position  in  the  bank  because  on  him 
falls  the  responsibility  of  paying  out  the  bank's  funds.  It 
is  not  questioning  the  measure  of  his  responsibility  to  point 
out  that  it  is  not  the  bank's  funds,  but  the  depositors'  money 
that  he  is  called  upon  to  pay.  If  this  money  is  paid  to  the 
wrong  person,  the  bank  is  liable  to  pay  it  again  to  the  proper 
payee,  and  if  the  teller  pays  out  some  of  the  bank's  money, 
as  well  as  the  depositor's,  in  other  words,  permits  an  over- 
draft, then  again  the  bank  loses.  This  teller,  therefore, 
stands  between  the  bank  and  loss.  Even  more  than  the 
receiving  teller,  his  personality,  his  mental  and  physical 
make-up  must  leave  nothing  to  be  desired.  He  must  be 
courteous,  patient,  alert,  well-informed  as  to  business 
methods  in  general,  keen  and  resourceful.  Above  all,  the 
teller,  whether  paying  or  receiving,  must  know  his  own 
bank  thoroughly.  Tellers  almost  invariably  are  graduates 
of  many  years'  experience  in  the  bank. 

When  a  check  is  presented  for  payment  at  the  window, 
the  teller  must  be  assured  of  the  following  facts:  that  the 
signature  of  the  drawer  is  genuine;  that  the  person  pre- 
senting the  check  is  the  payee,  or  if  the  check  has  more 
than  one  endorsement,  that  such  endorsements  are  all 
present  and  the  person  who  asks  payment  is  the  last  en- 
dorser; that  the  balance  of  the  drawer  is  sufficient  to  cover 
the  amount  of  the  check;  that  the  check  is  not  dated  ahead; 
that  there  is  no  order  from  the  drawer  on  file  to  stop  pay- 
ment. The  teller  must  be  certain  of  all  these  provisions; 
he  can  not  afford  to  take  any  chances.  Furthermore,  he 
must  have  all  necessary  information  at  his  fingers'  ends. 
The  average  bank  customer  does  not  realize  that  it  is  for 

47 


ELEMENTARY  BANKING 

his  good  that  the  teller  hesitates  or  insists  upon  identifica- 
tion. He  immediately  thinks  his  own  credit  is  in  question. 
Consequently  the  trained  teller  is  diplomatic  and  will  engage 
the  payee  in  conversation  while  an  assistant  may  look  up 
the  required  information,  or  he  may  satisfy  himself  in  other 
ways  that  everything  is  all  right  without  irritating  the  holder 
of  the  check.  When  a  check  is  presented  for  certification, 
the  paying  teller  takes  the  same  precautions  with  respect 
to  the  genuineness  of  the  signature,  balance  of  the  drawer 
and  the  question  of  payment  being  stopped  as  if  the  check 
were  presented  for  payment.  The  matter  of  endorsement 
will  be  taken  care  of  when  the  certified  check  is  finally  pre- 
sented for  payment.  Checks  are  certified  by  writing  or 
stamping  across  the  face  * 'Certified.  Good  when  properly 
endorsed. "  The  date  and  name  of  the  bank  with  the  sig- 
nature of  an  officer  or  teller  is  added.  The  account  of  the 
drawer  is  charged  at  once  and  the  effect  is  that  the  bank 
thereupon  assumes  the  liability  for  the  payment  of  the 
check. 

The  paying  teller  is  the  guardian  of  the  bank's  funds. 
He  usually  has  custody  of  the  vault  and  reserve  cash.  He 
sees  that  the  supply  of  money  in  various  denominations  is 
at  all  times  sufficient  for  the  needs  of  the  customers  and 
is  properly  arranged  for  quick  handling.  Money  paid  out 
is  counted  twice  before  leaving  his  hands,  but  in  order  to 
avoid  one  handling  while  the  line  before  his  window  waits, 
he  will  have  bills  crossed  in  piles,  or  under  bands,  con- 
taining so  many  one's,  two's,  or  five's,  as  the  case  may  be. 
Coins  are  neatly  piled  or  rolled  in  sealed  wrappers.  This 
work  is  done  by  assistants  during  the  day. 

The  bulk  of  the  vault  or  reserve  cash,  which  we  will  dis- 
cuss later,  is  seldom  disturbed.  It  is  usually  kept  in  an 
inner  compartment  requiring  a  duplicate  key  held  by  an 
officer.     The  teller  has  a  record  of  the  total  of  this  money 

48 


ELEMENTARY  BANKING 

and  of  the  denominations  into  which  it  is  divided.  The 
amount  of  counter  or  window  cash  which  is  brought  from 
the  vault  to  the  cage  each  day  is  listed  in  the  settlement 
book,  and  with  this  money  the  teller  begins  the  day's  work. 
During  the  entire  day  he  is  paying  out  cash  for  checks,  or 
shipping  it  to  out-of-town  correspondents  of  the  bank  upon 
their  written  or  telegraphic  order.  His  settlement  at  the 
end  of  the  day  is  even  more  simple  than  the  receiving  tel- 
ler's. The  amount  of  the  checks  he  has  cashed  and  handed 
to  the  bookkeepers  (or  if  they  are  payable  at  other  banks, 
to  the  receiving  teller),  plus  the  amount  of  cash  on  hand, 
must  equal  the  amount  he  began  the  day  with.  As  soon 
as  he  has  settled,  he  adds  to  his  own  cash  the  cash  which 
is  handed  him  by  the  receiving  and  other  tellers,  and  this 
sum  is  then  carried  forward  to  begin  the  next  day's  work. 

The  settlement  of  a  teller  who  is  both  paying  and  receiv- 
ing teller  is  a  combination  of  the  two.  The  teller  begins 
the  day  with  a  cash  balance  on  hand.  He  adds  to  this 
amount  the  deposits,  receipts  for  interest  on  loans,  drafts 
sold,  exchange,  etc.,  received  during  the  day.  At  the  close 
of  business,  the  total  of  his  cash  on  hand  plus  checks  for 
other  banks  and  checks  on  his  own  bank  (which  have  been 
cashed),  must  equal  his  total  receipts. 

Since  the  paying  teller  has  charge  of  the  reserve  funds  of 
the  bank,  we  will  discuss  briefly  the  principles  of  calculat- 
ing reserve.  Bank  reserve  may  be  defined  as  the  funds 
of  the  bank  that  are  uninvested.  In  this  country  the  law 
prescribes  both  the  percentage  of  reserve  that  must  be  kept 
and  also  where  and  of  what  kind  it  must  be.  In  nearly 
all  other  countries,  however,  the  rate  of  reserve  to  deposits 
is  not  fixed  by  law,  but  is  left  to  the  experienced  judgment 
of  the  bank  itself.  The  purpose  of  reserve  is  not  only  to 
care  for  the  normal  cash  needs  of  the  depositors,  but  also 
to  prevent  undue  expansion  of  bank  loans.    If  there  were 

49 


ELEMENTARY  BANKING 

no  legal  or  ordinary  business  restriction  on  bank  loans  we 
might  expect  to  see  all  the  bank's  funds  loaned  out,  and  we 
have  seen  in  an  earlier  chapter  how  unsafe  such  a  condition 
would  be. 

Reserve  is  calculated  on  net  deposits,  that  is,  deposits 
that  have  been  collected.  Referring  to  the  outline  of  the 
bank  statement  again,  we  understand  that  if  a  check  for 
$1,000.00  payable  in  Chicago  is  deposited  in  a  Boston  bank, 
the  deposits  of  the  Boston  institution  have  apparently  in- 
creased $1,000.00  and  the  item,  "due  from  banks,"  on  the 
other  side,  has  increased  the  same  amount.  The  $1,000.00 
is  really  not  a  part  of  the  deposits  because  it  is  not  yet 
collected,  and  good  banking  does  not  permit  a  depositor  to 
draw  against  uncollected  funds.  Therefore,  in  estimating 
reserve,  we  subtract  from  the  gross  deposits  all  the  items 
on  the  resource  side  representing  unpaid  checks.  We 
except  "due  from  reserve  agents,"  because  such  amounts 
are  collected  funds  subject  to  the  draft  of  the  bank.  A 
certain  percentage  of  the  net  deposits  must  be  kept  as  a 
reserve,  part  of  which  must  be  in  cash  and  another  part 
may.be  with  a  reserve  agent,  but  the  full  amount  must  be 
carried  or  the  bank  may  not  make  any  new  loans  or  declare 
a  dividend  until  the  reserve  is  restored.  The  percentage 
varies  depending  upon  the  kind  and  location  of  the  bank. 
One  of  the  functions  of  the  Federal  reserve  banks  is  to 
carry  the  reserves  of  the  national  and  other  member  banks, 
or  that  part  of  the  reserves  which  banks  may  keep  on 
deposit  outside  their  own  vaults.  The  importance  of  this 
provision  of  the  Act  is  indicated  by  the  fact  that  it  is  en- 
titled the  Reserve  Act.  Under  it  the  reserves  of  all  the 
member  banks  are  concentrated  in  the  Federal  reserve 
bank  of  the  district.  The  combined  reserves  of  which  the 
deposits  of  the  reserve  banks  consist,  are  thus  available  for 
the  relief  of  any  member  needing  additional  cash.     The 

50 


ELEMENTARY  BANKING 

member  borrows  money  from  the  reserve  bank  by  re- 
discounting  its  commercial  loans,  which  increases  the 
amount  "due  from  the  Federal  reserve  bank"  by  the 
amount  re-discounted. 


51 


ELEMENTARY  BANKING 


CM 

\n 

i 

CM 

O 

CM 


H 
g 

9 

H 
W 

CO 

B 

W 
H 

O 


NNONO 

<5    rH    i-H    ^H    © 

*6  *\  ^  cm  © 

h  ^n6\« 

cioTfH      cm 
to  oo 

i— t 


o  o  ©  10 

^H    lO    i-H    C^ 

cm  cm  co  cm 

CM  ©  ©  CM 

On  1-1  ^  lO 
1& 


to 

CM 

8 

CM 

to 


Ui 


■S 

co  «  a> 

s  53  +*    U> 

fi  .a  -£  &  H 


<^  *-« 


o  ©  o  o 

©  ©  ©  © 

cm  in  ©  d 

cm  cm  ©  © 

i-H  CM  O  J> 


©  ©  in 

cm  ^  ■* 

CM  CM  CM 

lO  CM   CM 


©  CO  lO  CO  M  W 


51 


&g  a  a  a 

*o  p  o  o  o 


3  «  .£  .2  .52 

>    O    0)    «    <u 

^  cu  a)  <u  a> 


v-.    0) 

&*  g 

CD   *^    Ctf 

bo  co   o> 
o-S  « 

«  °  2 
§  ^  w 


CD 

a 
5 
H 

bJO 

•I 


r]    CO     CD 


9   cri 


CD     ^ 

M  -m    cd 


ytd  b 


^ ^S  t: « «s 


1  •£ 

QO  W 


13 


w  _^  "C    aj    O    5 

•9 

O 


52 


ELEMENTARY  BANKING 


W 

9 

w 

H 
H 
W 
W 

CD 

« 

a 

3 
3 

w 

H 

O 
g 

1 


00 

Ov 

O^s 

+-^ 

S 

<o 

a 

"* 

co  o 

N 

*  '■§ 

N 

^  -3 

S    §  N*  N  ■*  PO  co 

<U   JS    <NJ    M    t-4    ©    O 

HH          °i  °i>  P~  ""1  ^1 

v— '        00  »h  O"  N  N 

io^^hn 

€/» 

o  m  o  o\ 

»-l    r-i    i-H    t^ 

n  to  co  n 

NOON 


00 

l> 

CO 

C» 

CO 
N 

i-i 
€^ 


I 


hO* 
CO  N 


8     Wn  *  to 


8 

8 

o  o  o  o 
©  ©  ©  © 

S?? 

8 

8 

odd 

N 

00  fO 

in  in  © 

nwo 

1>  I> 

lO 

lO 

*^ 

N  0\ 

I 

©  "*  |>  lO  «tfvO 

«-•   N 

€/> 

C* 

*  **  12  « 
'  «j  a 


*1    «h    5 

o  <v  & 

•  •  &  5 

o  o  o  M 

-t-»  ■+■>  -m    © 

*a  tj  *g 
«u  <p  4>  co 

cH  d   S   a) 

.a  .a  43  .a 
53 


T3 

o 

a 

o 

-4-» 

t 

e 
3 

s 


H)     CO 
3    CD 

i| 

.as 


o 

a  co  cd 

M  CD  +■» 


CU 


O   <a 

ill 

«H     0)     O 


CD 

.2  »Q    CD    CD 

•Z   W)-S  *5  ^  £    etf 

°  «)  *  °a  d  2 


»o  «* 


u    CO 

J3 

3  § 

o 


Note   Teller 

Negotiable  instruments  are  forms  used  in  the  business 
world  for  the  transfer  of  values.  In  the  ordinary  transac- 
tions of  commerce,  they  take  the  place  of  actual  money. 
We  have  learned  in  an  earlier  chapter  that  money  repre- 
sents value  and  negotiable  instruments  are  used  as  sub- 
stitutes for  money.  They  are  of  several  kinds.  Checks 
and  bank  drafts  are  payable  by  banks  on  demand  and 
hence  may  be  treated  as  cash.  Notes  and  drafts,  however, 
do  not  ordinarily  possess  this  facility,  since  they  are  usually 
payable  on  a  certain  date  and  they  are  paid  by  individuals 
rather  than  by  banks.  Therefore  they  must  be  handled  by 
banks  as  individual,  separate  pieces,  each  requiring  care 
and  diligence  in  presentation  and  collection.  Drafts  on 
individuals  must  be  presented  to  the  drawee  either  for  pay- 
ment or  acceptance,  and  notes  must  be  at  the  place  where 
they  are  made  payable  on  the  day  they  are  due.  Banks 
undertake  to  collect  these  items  for  their  customers  and 
pass  the  proceeds  to  the  credit  of  their  depositors.  This 
function  is  incidental  to  commercial  banking,  the  bank  act- 
ing as  the  agent  of  the  owner  of  the  paper  to  be  collected. 

In  small  banks  it  is  not  unusual  to  see  a  brass  sign  dis- 
played at  the  receiving  tellers  window,  reading  "pay  notes 
here."  Although  they  are  not  required  to  do  so  by  law, 
all  banks  send  notices  to  the  makers  of  notes  or  the  drawees 
of  drafts  that  they  hold  the  note  or  draft  awaiting  payment, 
and  some  one  of  the  tellers  or  clerks  is  assigned  the  duty 
of  receiving  payment.  As  the  bank  grows,  a  separate  de- 
partment is  organized  for  this  purpose  and  a  note  teller 
is  appointed.  He  is  usually  in  charge  of  the  messengers 
or  runners.  Instead  of  sending  out  notices,  the  bank  may 
render  its  customers  better  service  by  having  its  messengers 
present  the  items  for  payment  at  the  place  of  business  of 

54 


ELEMENTARY  BANKING 

the  payer.  The  messengers  also  present  checks  for  pay- 
ment at  banks  not  represented  in  the  clearing  house,  col- 
lect coupons  and  return  unpaid  checks  to  depositors.  It 
is  necessary  that  they  should  exercise  great  care  in  all 
these  transactions,  since,  for  the  time  being,  they  are  the 
accredited  representatives  of  the  bank  and  the  bank  is 
bound  by  their  actions. 

We  can  show  this  by  discussing  the  duties  and  responsi- 
bilities of  the  note  teller,  the  messengers  being  his  assistants. 
He  keeps  a  register  record  of  all  the  "time"  items  that  are 
placed  in  his  hands  for  collection.  This  record  consists  of 
the  name  of  the  payer,  the  endorser,  or  the  owner  of  the 
item  for  whom  the  bank  is  making  collection,  the  date  of 
maturity,  the  amount,  and  whether  the  item  is  to  be  pro- 
tested or  not  if  unpaid.  There  may  be  other  instructions, 
as,  for  example,  a  request  for  telegraphic  advice  of  pay- 
ment. A  column  is  used  to  record  the  final  disposition  of 
the  item  which  in  banking  parlance  is  called  "fate."  Usu- 
ally a  separate  register  is  used  for  drafts  because  they 
may  require  particular  care.  They  are  often  accompanied 
by  bills  of  lading  or  other  documents  that  are  to  be  deliv- 
ered only  when  the  drawee  has  paid  the  draft.  Drafts  are 
often  made  payable  "on  arrival  of  goods,"  and  the  note 
teller  keeps  in  touch  with  the  drawee  so  that  there  may 
be  no  unreasonable  delay  after  the  goods  covered  by  the 
draft  have  reached  their  destination. 

The  chief  responsibility  resting  upon  the  note  teller  and 
his  assistants  is  to  see  that  all  items  are  properly  presented 
to  the  right  parties  and  at  the  right  time.  What  due  pre- 
sentment consists  of  is  a  legal  point  which  we  need  not 
discuss  here,  except  to  say  that  the  bank  must  do  its  utmost 
to  reach  the  payer  and  secure  payment.  Only  cash  can  be 
accepted  in  payment,  although  all  banks  will  take  checks 
from  responsible  parties  when  drawn  upon  solvent  banks. 

55 


ELEMENTARY  BANKING 

The  custom  is  to  require  that  checks  presented  in  payment 
of  notes  or  drafts  should  be  certified.  (When  a  check  is 
certified  the  bank  charges  the  account  of  the  drawer  at 
once,  and  the  check  becomes  an  obligation  upon  the  bank 
rather  than  upon  the  drawer.) 

When  checks,  notes  or  drafts  are  not  paid  when  due  or 
when  properly  presented  for  payment  they  may  be  pro- 
tested. This  consists  of  presentation  by  the  bank's  legal 
representative  who  demands  payment.  If  the  item  is  then 
unpaid,  notice  to  that  effect  is  sent  to  the  maker  or  drawer 
and  all  endorsers.  The  endorsers  on  negotiable  instru- 
ments are  under  obligations  to  pay  in  case  the  drawer  or 
drawee  does  not,  provided  they  are  served  with  notice  that 
payment  has  been  legally  demanded  and  refused.  The 
protest  is  notice  to  them  that  proper  presentation  has  been 
made. 

In  making  his  proof  the  note  teller  enters  on  one  side  of 
a  sheet  the  name  and  amount  of  each  note,  draft  or  check 
which  is  to  be  collected  on  that  day.  As  the  items  are  paid, 
he  extends  the  amount  in  another  column  and  opposite  he 
makes  a  memo  of  the  funds  he  has  received.  This  memo 
is  technically  called  the  "satisfaction"  of  that  particular 
entry.  The  total  of  the  items  thus  "satisfied"  at  the  end 
of  the  day  must  be  equalled  by  the  cash  and  checks  which 
the  note  teller  hands  over  to  the  paying  and  receiving  tellers. 

A  subdivision  of  the  note  teller's  department  is  the  col- 
lection department,  although  some  banks  are  organized 
with  the  latter  as  a  subdivision  of  the  transit  department. 
The  collection  teller,  as  the  head  of  the  department  may 
be  known,  is  charged  with  the  collection  of  notes  and  drafts 
payable  out  of  town.  These  items  cannot  be  listed  with 
checks  and  cash  items,  but  are  entered  on  separate  sheets. 
The  same  methods  of  bookkeeping  and  collection  apply  as 
with  out-of-town  cash  items,  except  that  credits  and  debits 

56 


ELEMENTARY  BANKING 

are  made  only  upon  receipt  of  advice  that  the  items  are 
paid.  Checks  and  cash  items,  on  the  other  hand,  are 
credited  to  the  depositors  on  the  day  of  deposit,  subject, 
of  course,  to  final  payment.  That  is,  if  the  items  are  "not 
good,"  they  will  be  returned  and  the  account  of  the  deposi- 
tor will  be  charged.  This  plan  is  adopted  for  mutual  con- 
venience made  necessary  by  the  great  numbers  of  checks 
that  are  deposited  daily  in  every  bank.  If  every  separate 
item  required  a  special  advice  of  payment  and  would  be 
credited  only  upon  receipt  of  such  advice,  banks  would  be 
compelled  to  increase  the  number  of  their  clerks  enormously. 

Out-of-town  collections  are  governed  by  the  same  rules 
as  city  collections.  The  collection  clerk  or  teller  makes  a 
register  record  of  the  name  of  the  payer,  the  place  payable, 
the  endorser,  and  the  amount  together  with  other  instruc- 
tions. Usually  this  record  is  entered  on  slips  made  with 
carbon  copies,  and  the  slips  are  filed  in  drawers  or  cases 
until  advice  is  received.  If  the  bank  is  notified  by  its  bank 
correspondent  that  an  item  has  been  paid,  the  slip  is  taken 
out  and  marked  "Paid."  It  is  then  handed  to  the  book- 
keepers. Using  the  slip  as  a  debit  or  credit  memorandum 
the  account  of  the  depositor  is  credited  and  the  account 
of  the  bank  to  whom  the  item  was  sent  is  debited. 

The  collection  teller  is  responsible  for  the  items  entrusted 
to  his  care.  He  must  see  to  it  that  notes  reach  the  town 
where  they  are  payable  before  maturity,  that  drafts  are  sent 
to  responsible  banks  for  collection,  that  all  instructions  sent 
with  the  items  are  fully  obeyed  and  that  correct  and  prompt 
advice  of  payment  or  dishonor  is  received. 


57 


Individual   Ledgers 

The  individual  ledgers  are  the  books  upon  which  the 
detail  records  of  the  deposits  are  kept.  Such  records  con- 
sist of  either  debits  or  credits  and  the  balance.  Modern 
ledgers  allow  three  columns  to  each  account,  one  for  debits, 
one  for  credits  and  one  for  the  balance,  although  many 
banks  still  use  the  two-column  ledger,  the  credits  being 
posted  beneath  the  balance  which  is  extended  in  red  ink. 
Bound  ledgers  are  gradually  giving  way  to  loose  sheets  or 
cards,  each  account  having  a  separate  leaf  or  card.  This 
plan  is  much  more  convenient  since  closed  or  "dead" 
accounts  can  be  eliminated  and  inactive  accounts  can  be 
kept  separate  from  those  that  are  active.  It  is  also  easier 
to  make  alphabetical  splits  in  the  ledgers  when  an  increase 
of  work  makes  it  necessary. 

While  there  are  several  bookkeeping  systems  employed 
by  banks,  they  are  all  alike  in  principle  and  vary  only  be- 
cause the  business  of  the  customers  warrants  different 
labor-saving  methods  on  the  part  of  the  bank.  For  ex- 
ample, active  commercial  accounts  require  considerable 
posting  of  checks  and  deposit  tickets  daily  and  the  balances 
are  constantly  changing.  Savings  banks,  on  the  other 
hand,  deal  with  a  class  of  people  who  make  deposits  only 
at  irregular  intervals  and  withdrawals  are  also  infrequent. 
We  will  discuss  the  methods  usually  employed  in  a  com- 
mercial bank  using  the  three-column,  loose-leaf  ledger. 

The  bookkeeper  receives  checks  from  both  the  paying 
and  receiving  tellers,  although  in  some  very  large  banks 
they  come  to  him  from  the  check  teller  who  assorts  the 
checks  as  to  the  ledgers  and  examines  the  signatures  and 
the  endorsements.  Sometimes  the  bookkeeper  is  held  re- 
sponsible for  the  payment  of  a  check  bearing  a  forged  or 
incorrect  signature  or  endorsement,  but  usually  his  liability 

58 


ELEMENTARY   BANKING 

in  this  direction  is  limited  to  * 'stop-payments."  A  good 
bookkeeper,  however,  whether  he  is  specifically  charged 
with  this  duty  or  not,  is  always  on  guard  against  irregular- 
ities. Checks  come  in  "courses"  from  the  tellers,  that  is, 
at  certain  times  during  the  day,  after  exchanges  are  re- 
ceived from  the  clearing  house,  or  the  morning  mail  is 
opened  and  at  other  fixed  periods,  batches  of  checks  come 
into  the  bookkeeper's  hands.  He  assorts  them  alphabetic- 
ally and  enters  them  upon  a  journal  which  is  usually  a  loose 
sheet  that  fits  into  an  adding  machine.  A  total  of  the 
checks  of  each  depositor  is  struck  and  these  totals  are  then 
posted  in  the  debit  columns  against  the  proper  accounts. 
There  are  ledgers  in  use  which  have  an  extra  column  for 
detail  checks,  so  that  no  journal  is  necessary.  As  the 
bookkeeper  posts,  he  watches  the  balances  to  see  that  the 
accounts  are  not  overdrawn.  He  must  be  extremely  care- 
ful not  to  post  checks  to  the  wrong  account.  This  is  very 
apt  to  happen  if  the  bookkeeper  is  careless,  because  nearly 
all  banks  have  accounts  of  similar,  and  sometimes  identical 
names.  If  a  check  drawn  by  John  A.  Smith  is  refused  as 
not  good  because  the  account  has  been  apparently  over- 
drawn by  certain  checks  that  should  have  been  charged  to 
John  E.  Smith,  the  bank  is  not  only  apt  to  lose  a  good 
account,  but  may  even  be  liable  to  John  A.  Smith  for  what- 
ever damage  his  credit  has  suffered. 

Alternating  with  the  posting  of  debits,  the  bookkeeper 
posts  the  credits  or  deposit  tickets  which  also  run  in 
"courses."  In  making  credit  entries  as  much  care  must 
be  observed  as  in  posting  debits  and  for  the  same  reasons. 
In  addition  to  the  deposit  ticket  entries  there  may  be  other 
kinds  of  credits.  If  the  depositor  has  received  a  loan,  the 
bookkeeper  receives  advice  of  the  amount  from  the  loan 
clerk  and  opposite  the  amount  in  the  credit  column  he  may 
place  a  mark,   "L"  meaning  loan,   "N"  meaning  note,  or 

59 


ELEMENTARY  BANKING 

"D"  meaning  discount.  If  a  collection  item  has  been  paid, 
the  credit  will  be  marked  "C."  These  marks  are  merely 
an  abbreviated  method  of  identifying  entries,  of  assistance 
in  the  process  of  examining  the  accounts  of  the  bank. 

At  the  end  of  the  day  the  bookkeeper  puts  all  his  checks 
together  in  alphabetical  order  and  arranges  the  deposit 
tickets  similarly.  Most  banks  are  now  using  the  "state- 
ment system"  of  balancing  pass-books.  This  work  is 
done  by  a  separate  clerk  or  subdivision  of  the  bookkeeping 
department.  Each  depositor  has  a  separate  sheet  or  state- 
ment on  which  are  entered  the  daily  transactions.  This  is 
sometimes  called  the  "skeleton  ledger,"  because  its  chief 
purpose  is  to  show  the  daily  balance  of  each  account  rather 
than  the  detail.  Since  all  the  checks  and  deposit  tickets 
are  posted  the  following  day,  and  hence  are  available  for 
posting  without  any  delay,  the  statement  clerk  is  able  to 
handle  many  more  accounts  than  the  bookkeeper  whose 
work  comes  to  him  in  relays.  After  the  checks  and  tickets 
are  entered  on  the  statement,  they  are  filed  away,  the 
deposit  tickets  remaining  in  possession  of  the  bank  and  the 
checks  being  handed  to  the  depositor  at  the  end  of  the 
month.  Time  was  when  the  checks  were  also  retained  (as 
they  still  are  in  some  foreign  banks),  but  the  custom  has 
grown  in  this  country  to  regard  the  endorsement  on  a  check 
as  a  receipt  in  payment  of  a  debt.  The  completed  monthly 
statements,  showing  the  balance  of  each  depositor,  are 
compared  with  the  ledger  balances  to  prove  the  correctness 
of  the  amounts  and  they  are  then  given  to  the  depositors. 
Under  the  pass-book  settlement  system,  the  deposit  entries 
in  the  book  are  added  to  the  last  settlement  balance,  the 
checks  are  listed  on  an  adding  machine  and  the  total  is 
deducted,  showing  the  new  balance  which  must  agree  with 
the  ledger  balance. 

Probably  the  first  thing  the  bookkeeper  will  do  in  the 

60 


ELEMENTARY  BANKING 

morning  is  to  make  up  a  list  of  balances  of  all  the  important 
accounts.  This  is  usually  a  pencil  memorandum  and  is 
handed  to  the  paying  teller  or  an  officer  for  their  informa- 
tion and  guidance.  Another  duty  to  be  performed  at  odd 
moments  during  the  day  is  keeping  the  record  of  interest 
bearing  balances.  Banks  differ  as  to  the  method  of  cal- 
culating the  net  balance  upon  which  interest  is  allowed. 
The  usual,  and  incidentally,  the  soundest  method  is  to 
deduct  from  the  balance  the  amount  of  checks  presented 
against  it  that  day  and  the  amount  of  uncollected  checks 
represented  by  deposits  of  out-of-town  items  deposited  dur- 
ing the  preceding  days.  The  length  of  time  such  deductions 
cover  is  governed  by  the  distance  and  time  taken  in  collect- 
ing them.  Interest  is  then  allowed  on  the  net  balance 
since  this  represents  the  true  balance  of  the  depositor 
available  for  loans.  The  principle  is  the  same  as  that 
underlying  the  calculation  of  reserve. 

INDIVIDUAL  BOOKKEEPER'S  SETTLEMENT 


Paying  Teller  Balance  Aug.  1 .  $206,142.10 

checks $29,316.10     Deposits 52,143.16 

Receiving  Teller                          Collections 1,624.15 

checks 11,416.05     Loans 2,500.00 

Balance  Aug.  2 .  221,677.26 


$262,409.41  $262,409.41 


Few  modern  banks — if  we  except  the  mutual  savings 
banks — use  the  "trial  balance"  system  of  settlement  for 
the  individual  ledgers.  Settlement  is  made  daily.  The 
bookkeeper  begins  the  day  with  a  total  of  all  the  balances 
as  they  were  at  the  close  of  the  preceding  day's  business. 

61 


ELEMENTARY  BANKING 

After  he  has  finished  the  day's  postings,  he  makes  his  proof 
by  adding  all  the  credits  to  this  balance  total  and  then  sub- 
tracts the  debits  or  total  of  checks  as  shown  on  his  journals. 
The  sum  of  the  new  balances  which  he  gets  by  running  his 
accounts  on  an  adding  machine  must  equal  the  figures  shown 
on  his  calculation. 

As  an  illustration  of  the  way  in  which  the  figures  of  one 
clerk  serve  as  a  check  on  the  figures  of  another,  the  book- 
keeper's proof  furnishes  a  good  example.  The  totals  of 
checks  charged  against  the  various  accounts  are  taken  from 
the  bookkeeper's  journal  and  these  totals  must  agree  with 
the  figures  the  tellers  use  in  their  own  settlements.  This 
is  also  true  of  the  total  of  deposits,  etc. 


62 


General  Ledger 


The  general  ledger  bookkeeper  is  the  Bookkeeper  of  the 
Bank.  It  may  be  said  that  all  other  books  and  records  are 
a  part  of  the  general  ledger.  Every  transaction  of  what- 
ever nature  gravitates  to  this  ledger.  The  keeper  of  the 
general  ledger  may  be  said  to  be  the  dealer  in  wholesale 
figures;  the  other  clerks  are  the  retailers.  He  has  to  do 
with  totals  of  completed  transactions;  the  tellers  and  other 
bookkeepers  are  concerned  with  the  details.  The  accounts 
on  the  general  ledger  consist  of  the  items  in  the  bank's 
statement  of  condition,  known  as  the  "control  accounts." 

The  general  ledger  bookkeeper  makes  his  postings  at 
the  end  of  the  day  or  the  first  thing  in  the  morning  before 
the  bank  has  opened  for  business.  No  matter  how  large 
the  bank  may  be,  this  posting  of  debit  and  credit  totals 
takes  but  very  little  time,  and  in  small  banks  the  cashier 
may  do  this  work.  More  often  the  clerk  who  "runs"  the 
individual  ledger  is  also  responsible  for  the  general  ledger. 

In  large  banks  the  head  bookkeeper  (as  he  is  sometimes 
called)  is  given  additional  duties  and  responsibilities.  He 
makes  the  daily  calculation  of  reserve  and  keeps  the  record 
of  the  earnings  and  similar  data.  Most  banks  keep  a  book 
which  is  known  as  the  "daily  comparative  statement"  book. 
In  this  book  a  record  is  kept  showing  the  figures  of  each 
day  side  by  side  with  the  same  items  of  that  day  the  pre- 
vious year  or  years.  These  "vital  statistics"  are  of  great 
interest  and  value  to  the  officers  and  directors  and  often 
serve  as  a  guide  that  will  indicate  what  may  be  expected. 
With  this  knowledge  thus  tabulated,  the  bank  is  able  to 
serve  its  patrons  more  intelligently,  since  by  using  the  law 
of  averages  a  reasonable  forecast  can  be  made  and  the 
needs  of  depositors  and  borrowers  may  be  anticipated. 

One  of  the  important  items  in  the  general  ledger  is  the 

63 


ELEMENTARY   BANKING 

discount  account  in  which  the  earnings  of  the  bank  are 
entered.  When  a  loan  is  made  the  interest  charged  by 
the  bank  is  entered  in  this  account.  At  regular  intervals, 
usually  once  each  six  months,  discount  account  is  charged 
and  the  expense  account  is  credited  a  sufficient  amount  to 
pay  for  salaries  and  other  expenses.  If  the  bank  has  been 
prosperous  a  dividend  is  declared  and  an  amount  set  aside 
among  the  liabilities  as  "Dividend  Number  74,"  or  what- 
ever the  number  may  be.  Checks  bearing  this  dividend 
number,  signed  by  the  cashier,  are  then  mailed  to  the 
stockholders,  and  as  they  are  presented  for  payment  they 
are  charged  to  dividend  account.  Any  additional  sum 
remaining  in  discount  account  may  then  be  carried  into 
"Undivided  Profits,"  or,  if  large  enough,  will  be  added  to 
the  surplus.  The  stock  book  which  contains  the  names  of 
the  stockholders  and  the  number  of  shares  held  by  each, 
may  also  be  kept  by  the  head  bookkeeper. 

The  general  bookkeeper  usually  has  charge  of  the  ac- 
counts with  other  banks.  These  are  kept  just  as  the 
individual  accounts  are,  and  are  subject  to  the  same  kinds 
of  debits  and  credits.  In  addition  to  the  credit  accounts, 
or  those  accounts  which  represent  the  balances  of  other 
banks,  there  are  usually  many  debit  balances,  which  in 
total  are  carried  on  the  general  ledger  as  "due  from  banks." 
As  each  day's  letters  containing  checks  are  sent  to  cor- 
respondent banks,  the  amount  of  such  checks  are  debited 
to  these  banks.  As  remittances  are  received  in  payment, 
the  accounts  are  credited.  A  daily  record  is  kept  of  each 
account,  known  either  as  the  "statement"  or  "account 
current,"  and  at  the  end  of  the  month  this  statement  is 
ruled  up  and  forwarded  to  the  correspondent  banks  for 
'  'reconcilement." 

Since  there  are  letters  in  transit,  drafts  not  yet  paid, 
collection  credits,  returned  items  and  other  entries  con- 

64 


ELEMENTARY  BANKING 


3     £ 


o 

H 

w 
S3 


s  *° 

w  w 

3  .2 
Pi 

°  K 

s  8 

a>  *^ 

s  g 


4)      .* 

>       O 


I    £ 


o 
H 


2  ° 

q  «-h 

©  vd 

O  CM 

in  ca 


M 

M 

t> 

00 

M 

00 

CO 

m 

CO 

T-i 

-* 

lO 

»-t 

€« 

»°  tj<  in 

d  ..  v©  \o 

I  I  6  o 

(o  .Jr. 


3      2  2 

4)  W 

•o        o  o 

£      fc  O 


fe 


o 

.— t 


©  o 


8vO 

©  -* 

lO    ^H 


in 


o 

a 

•a 
IE 

o 


o 


o 


00 


o 

s    m*> 

o 

65 


d  ©  <w 

MO    0) 

Htort 


I 


ELEMENTARY   BANKING 

stantly  "in  the  air"  between  two  banks  that  do  business 
with  each  other,  this  reconcilement  is  necessary  if  the 
accounts  are  to  be  settled  as  of  any  given  day.  It  is  very 
interesting  work  and  an  example  of  the  method  used  may 
be  given.  We  will  assume  that  a  city  bank  has  sent  a 
monthly  statement  to  a  country  bank  showing  the  actual 
debits  and  credits  for  the  month  and  the  balance. due  the 
country  bank.  The  country  bank  would  then  fill  out  a 
reconcilement  blank  about  as  shown  on  the  previous  page 
and  mail  it  to  the  city  bank. 

The  purpose  of  the  reconcilement,  as  will  be  seen,  is  to 
account  for  the  difference  between  the  balances  shown  on 
the  books  of  the  two  banks  on  the  same  date.  Errors  or 
omissions  of  debit  or  credit  entries  are  then  adjusted. 


66 


Loans   and   Discounts 

Banks  exist,  as  we  have  learned,  in  order  that  the  sur- 
plus wealth  which  is  stored  up  may  be  loaned  out  and  put 
to  use  through  commerce,  trade  and  industry  in  the  pro- 
duction of  more  wealth.  Banks  perform  this  function 
through  the  medium  of  loans  and  discounts.  The  difference 
between  the  two  terms  is  purely  technical.  All  bank  in- 
vestments, whether  by  the  discount  of  promissory  notes, 
straight  loans,  mortgages  or  bonds,  are  loans. 

We  can  best  understand  this  subject  from  the  viewpoint 
of  the  borrower.  A  purchases  $1,000.00  worth  of  leather 
from  B,  which  A  intends  to  manufacture  into  shoes,  which 
he  will  sell  at  a  profit.  The  whole  operation,  from  the 
time  the  leather  is  secured  until  the  shoes  are  sold,  will 
take  A  three  months,  let  us  say.  He,  therefore,  executes  a 
note  in  which  he  promises  to  pay  B  $1,000.00  ninety  days 
from  date.  B,  however,  prefers  not  to  wait  until  the  note 
matures,  that  is  to  say,  the  time  A  will  have  received  the 
money  for  the  shoes  with  which  he  will  pay  for  the  leather 
used.  B  can  use  the  money  in  his  own  business  at  the 
present  time.  He  takes  the  note,  A's  promise  to  pay,  to 
the  bank  and  the  bank  * 'discounts"  it;  that  is,  the  bank 
gives  B  credit  for  the  amount  of  the  note  less  the  interest 
for  ninety  days.  In  effect,  the  bank  has  loaned  B  $1,000.00 
for  three  months,  but  at  the  end  of  that  time,  when  the 
note  falls  due,  it  is  A  who  reoays  the  bank  and  not  B.  Dis- 
counting may  be  defined  as  the  process  through  which 
future  maturities  are  converted  into  immediate  cash. 

In  the  above  case  the  bank  has  loaned  B  money  on  the 
security  of  A's  note.  This  transaction,  in  which  three 
parties  are  involved,  A,  B  and  the  bank,  is  commonly  called 
"discount."  The  technical  term  "loan"  is  applied  when 
there  are   only  two  parties   directly  concerned,   the  bank 

67 


ELEMENTARY  BANKING 

and  the  borrower.  For  instance,  let  us  suppose  A,  a  regu- 
lar customer  of  B,  has  bought  $1,000.00  worth  of  leather. 
Two  other  methods  of  making  payment  in  which  banking 
is  involved  are  possible  in  addition  to  the  first  example 
given.  B  may  offer  A  a  discount  if  the  bill  is  paid  in  cash 
within  ten  days.  In  order  to  take  advantage  of  this  dis- 
count, A  will  go  to  the  bank  and  borrow  the  $1,000.00  with 
which  to  make  immediate  payment.  He  makes  the  note 
payable  to  the  bank  instead  of  to  B,  secures  the  money 
and  makes  payment,  thus  getting  the  advantage  of  the 
discount  offered  by  B.  It  will  be  noticed  that  B  is  put  to 
practically  the  same  expense  in  either  case.  Still  another 
practice  would  be  for  B  to  extend  credit  to  A  on  what  is 
known  as  "open  account."  That  is,  for  a  certain  period 
agreed  upon  between  buyer  and  seller,  B's  books  will  show 
that  A  owes  him  $1,000.00.  But  B  needs  cash.  He  does 
just  what  A  did  in  the  preceding  example:  he  borrows 
money  from  the  bank  on  his  own  note. 

In  the  case  of  the  discount,  if  A  fails  to  pay  the  note 
when  due,  the  bank  may  look  to  B,  who  has  endorsed  the 
note,  upon  the  strength  of  which  B  was  able  to  borrow 
from  the  bank.  In  the  case  of  the  loan,  however,  with  no 
third  party  involved,  the  bank  often  requires  protection 
in  the  shape  of  collateral,  such  as  stocks,  bonds,  ware- 
house receipts  or  any  other  negotiable  paper.  Or  the 
security  may  be  real  estate,  if  the  bank  is  permitted  by 
law  to  make  loans  secured  by  real  estate. 

There  is  a  wise  provision  in  the  National  Bank  Act  which 
limits  the  amount  a  bank  may  loan  to  one  individual  or 
interest  to  10%  of  the  bank's  capital  and  surplus.  Many 
states  have  a  similar  law,  the  purpose  of  which  will  be 
discussed  in  a  later  chapter.  It  becomes  necessary,  there- 
fore, for  large  industries  which  borrow  heavily  to  distribute 
their    loans    among   many    banks.     This    is    accomplished 

68 


ELEMENTARY  BANKING 

through  note  brokers,  who  "buy"  the  notes  of  such  firms 
and  then  "sell"  them  to  any  bank  having  more  funds  than 
there  is  demand  for  from  their  own  local  customers. 
These  notes  are  known  as  "commercial  paper."  Banks 
often  find  themselves  in  the  same  need  of  cash  for  reserve 
or  other  purposes  as  individuals  or  corporations,  and  they, 
too,  take  advantage  of  the  process  of  discounting  by  re- 
discounting  their  loans  with  the  Federal  reserve  banks. 

Loans  are  of  several  kinds  in  addition  to  the  ordinary 
commercial  loans  or  discounts  which  we  have  been  dis- 
cussing. People  who  deal  in  goods,  such  as  manufac- 
turers, jobbers,  retailers  and  the  like,  need  money  at  cer- 
tain seasons  to  buy  raw  materials,  replenish  stock,  pay 
for  labor,  etc.  Loans  for  these  purposes  have  fixed  matur- 
ities because  the  money  will  be  "turned  over"  in  a  definite 
time,  represented  by  the  period  between  the  production 
and  consumption  of  the  commodity  dealt  in.  Dealers  in 
credit  and  money,  investors,  brokers  and  kindred  lines 
borrow  money  for  indefinite  periods,  since  there  are  no 
certain  rules  which  govern  the  demand  for  their  goods. 
A  man  will  buy  an  overcoat  in  the  fall  of  the  year,  but  he 
may  buy  a  bond  or  a  piece  of  property  at  any  time.  Hence 
we  have  the  "demand  loan"  which  may  be  paid  at  any 
time  at  the  option  of  either  the  borrower  or  the  bank.  The 
"call  loan,"  usually  found  in  cities  where  there  is  a  stock 
exchange,  is  of  the  same  nature.  Call  and  demand  loans 
are  almost  invariably  secured  by  collateral.  Mortgage  loans 
are  loans  secured  by  a  pledge  of  real  estate  or  personal 
property.  In  the  West  growing  crops  or  live  stock  are 
frequently  used  as  mortgage  security. 

Loans  and  discounts  are  handled  by  an  officer  of  a  small 
bank,  but  in  larger  institutions  a  separate  department  has 
charge  of  the  records  and  the  mechanical  details  of  the 
work,  although  the  actual  loaning  of  the  bank's  money  is 

69 


ELEMENTARY  BANKING 

always  done  by  an  officer  of  the  institution,  regardless  of 
its  size  or  kind.  A  kind  of  journal  record  is  kept  of  the 
loans  made  each  day.  Sometimes  this  book  is  known  as 
the  "Offering  Book,"  in  which  is  entered  every  note  offered 
for  discount.  Those  not  accepted,  or  undesirable  loans, 
are  stricken  off  this  original  book  of  entry.  The  loans 
made  are  transferred  to  the  loan  or  discount  register. 
This  is  usually  a  double  page  book,  the  record  extending 
across  two  pages.  In  columns  of  suitable  width  are  entered 
the  following  records  of  each  loan:  maker,  endorser  (or  collat- 
eral), amount,  where  payable,  when  due,  rate,  discount,  pro- 
ceeds. This  record  may  vary  as  to  details.  For  example,  one 
register  may  be  used  for  both  time  and  demand  loans,  secured 
or  unsecured,  etc.,  while  other  banks  may  find  it  advisable 
to  use  a  separate  register  for  each  kind  of  loan,  or  if  a 
single  register  is  used,  further  detail  is  provided  for. 

The  loans  are  then  posted  on  the  Liability  Ledger.  This 
record  consists  of  the  "liability  balance"  of  each  borrower, 
either  on  notes  he  has  signed  or  notes  he  has  endorsed. 
His  liability  as  borrower  is  kept  in  columns  separate  from 
his  -liability  as  endorser  or  surety.  The  first  record  may 
be  used  in  accounting,  since  the  sum  of  the  balances  due 
by  all  borrowers  will  prove  the  corresponding  figures  on 
the  general  ledger,  while  the  figures  showing  liability  as 
endorser  or  surety  are  useful  chiefly  for  credit  purposes. 
The  loans  are  next  posted  on  the  maturity  tickler,  which  is 
simply  a  daily  memorandum  of  loans  as  they  fall  due. 
This  completes  the  records,  the  notes  being  then  filed  in  a 
portfolio  in  the  order  of  their  maturity.  Collateral  is  listed 
upon  cards  and  then  placed  in  a  proper  vault,  or  the  collat- 
eral may  be  recorded  upon  the  face  of  an  envelope  in  which 
it  is  enclosed.  Provision  is  made  for  keeping  records  of  sub- 
stitutions of  collateral,  and  when  the  borrower  pays  the  loan 
he  signs  a  receipt  for  the  collateral  which  is  returned  to  him. 

70 


ELEMENTARY   BANKING 

The  bank,  if  it  be  a  commercial  bank,  is  always  careful 
to  invest  its  money  in  loans  that  mature  in  regular  order. 
That  is,  unless  loans  are  falling  due  each  day,  the  bank 
will  not  be  in  position  to  extend  credit  to  its  customers 
as  they  need  it.  The  loaning  officers  keep  close  watch  on 
the  maturity  tickler  which  guides  them  in  placing  loans. 
There  are  seasonal  demands  for  money,  as  for  example, 
the  crop  moving  period,  when  there  must  be  plenty  of  money 
available  for  the  needs  of  borrowers.  Not  all  the  bank's 
customers  are  borrowers,  however;  the  needs  of  the  de- 
positor must  also  be  taken  into  consideration.  When  a 
bank  makes  a  loan,  the  usual  practice  is  to  increase  the 
deposit  account  of  the  borrower  by  the  amount  of  the  loan. 
As  a  depositor  the  borrower  is  given  the  privilege  of  draw- 
ing checks  against  his  balance,  and  the  bank  must  be  in 
position  to  meet  not  only  normal  demands,  but  also  unusual 
and  at  times  unexpected  withdrawals.  It  would  not  be 
able  to  do  this  if  all  the  loans  were  of  one  kind.  A  certain 
proportion  of  its  funds  may  be  loaned  on  "commercial 
paper,"  that  is,  notes  bought  from  brokers  which  the  bank 
is  under  no  obligation  to  renew  at  maturity.  Still  another 
portion  may  be  invested  in  good  bonds  that  will  find  a 
ready  market  in  case  of  need.  These  may  be  sold  if  it  is 
necessary  to  increase  the  supply  of  cash.  Bonds  furnish 
such  an  excellent  form  of  liquid  investment  in  this  connec- 
tion that  they  are  sometimes  called  "secondary  reserve." 
Before  taking  up  the  subject  of  bonds  and  their  uses,  we 
will  discuss  the  credit  department. 

Let  us  go  back  to  our  little  country  bank,  situated  in  a 
town  of  five  hundred  people.  Here  we  would  find  every 
member  of  the  board  of  directors,  the  president,  cashier 
and  the  general  clerk  of  the  bank  more  or  less  intimately 
acquainted  with  every  business  man  in  town.  If  a  cus- 
tomer of  the  bank  offers  a  note  for  discount,  the  cashier 

71 


ELEMENTARY  BANKING 

seldom  needs  to  ask  questions.  He  knows  the  character 
of  the  borrower,  his  next  door  neighbor,  perhaps.  He 
knows  about  his  client's  business  needs  and  habits,  because 
he  himself  does  business  with  him.  He  is  therefore  able 
to  decide  whether  or  not  the  loan  is  a  "safe  risk"  out  of 
his  own  knowledge  of  the  facts.  In  a  larger  community 
it  would  be  impractical,  if  not  impossible,  for  the  cashier, 
in  addition  to  his  other  duties,  to  keep  track  of  every  local 
borrower  and  the  bank  may  employ  a  "credit  man"  who 
specializes  in  credits.  The  next  step  is  the  organization 
of  a  credit  department  usually  in  charge  of  one  of  the 
officers  of  the  bank. 

The  credit  department  collects  and  files  every  available 
bit  of  information  concerning  people  or  firms  that  borrow 
money.  This  material  consists  of  financial  reports,  press 
chppings,  personal  interviews,  statements  of  condition  and, 
in  fact,  every  item  that  has  even  a  remote  bearing  upon  the 
standing  of  borrowers.  It  requires  technical  training  of  a 
high  order  to  properly  classify  and  analyse  this  data,  but 
the  fundamental  idea  is  to  get  down  to  the  same  knowledge 
of  the  true  facts  as  our  country  bank  cashier  has  at  his 
command,  with  respect  to  his  neighbor.  Credit  is  based 
upon  character  or,  as  bankers  put  it,  the  "moral  risk."  A 
simple,  but  practical  definition  of  credit  is  "the  ability  to 
buy  with  a  promise  to  pay."  He  who  has  "good  credit" 
can  command  either  goods  or  money  because  of  the  faith 
or  belief  that  others  have  in  his  promise.  The  word  "credit" 
is  derived  from  the  Latin  "Credo" — I  believe.  It  is  not 
only  essential  that  the  borrower  have  the  ability  to  pay  his 
note  when  it  is  due;  he  must  also  have  the  desire  or  in- 
clination to  pay.  To  be  able  to  loan  money  wisely  and  to 
those  who  are  entitled  to  it,  in  short,  the  ability  to  dis- 
tinguish between  a  safe  risk  and  an  unsafe  one,  is  the 
quality  that  marks  the  good  banker. 

72 


Stocks  and  Bonds 

In  a  previous  chapter  we  discussed  the  importance  of 
capital  and  how  it  arises  as  the  result  of  the  creation  of 
surplus  wealth.  A  bank  was  described  as  a  storehouse 
where  this  accumulated  surplus  is  gathered  together  and 
loaned  out  to  those  who  need  it  in  carrying  on  agricultural, 
industrial  and  commercial  enterprises.  Not  all  capital  is  of 
the  same  kind;  it  is  either  "fixed"  or  "circulating."  Fixed 
capital  is  represented  by  such  things  as  buildings,  tools, 
machinery,  rolling  stock,  etc.  It  is  fixed  in  the  sense  that 
it  needs  to  be  renewed  only  at  long  intervals.  Circulating 
capital,  on  the  other  hand,  must  be  constantly  renewed  and 
it  is  represented  by  the  things  for  which  money  is  bor- 
rowed from  banks — raw  materials,  fuel,  funds  for  wages, 
etc.  Fixed  capital  may  be  defined  as  money  that  is  in- 
vested; circulating  capital  is  money  that  is  loaned.  These 
are  not  exact  economic  definitions,  but  they  will  serve  to 
show  the  difference  between  the  two  from  the  banker's 
point  of  view. 

With  the  supplying  of  fixed  capital  the  commercial  banker 
has  nothing  to  do.  The  money  entrusted  to  his  care  must 
be  so  loaned  as  to  be  available  upon  the  demand  of  his 
depositors,  or  at  least  within  a  reasonable  interval.  Obvi- 
ously money  invested  in  the  fixed  capital  of  any  business 
cannot  be  withdrawn  at  will.  Stocks  represent  this  kind 
of  capital.  The  stockholder  becomes  part  owner  of  the 
business  in  proportion  to  the  amount  of  capital  stock  owned. 
He  shares  the  risks  incidental  to  the  business  and  he  also 
enjoys  the  profits  if  the  venture  is  successful.  Stocks  have 
neither  maturity  nor  a  fixed  return  in  the  shape  of  interest. 
The  only  way  the  stockholder  can  recover  his  share  of  the 
capital  is  to  sell  it  to  someone  else.  For  returns  he  must 
look  to  the  dividends  which  are  paid  only  if  profits  are  made. 

73 


ELEMENTARY  BANKING 

Indeed,  the  stockholder  as  part  owner  is  liable  to  an  assess- 
ment to  make  good  when  losses  occur.  Stockholders  of 
national  banks,  for  instance,  may  be  assessed  an  additional 
amount  equal  to  their  stock  if  the  assets  of  the  bank  become 
reduced  through  losses  and  are  not  sufficient  to  meet  the 
liabilities. 

Bonds,  on  the  other  hand,  are  loans.  The  bond-holder 
has  loaned  the  "obligor,"  or  the  corporation  issuing  the 
bond,  a  sum  of  money  represented  by  the  amount  of  his 
bonds.  The  bond  is  a  promise  to  pay.  It  has  a  fixed  and 
definite  maturity  and  yields  a  known  rate  of  interest. 
Therefore  bonds  are  suitable  investments  for  banks,  whereas 
stocks  are  not.  The  difference  between  bonds  and  ordi- 
nary promissory  notes  is  one  of  dimensions.  A  bond  issue 
is  for  millions,  rather  than  hundreds,  of  dollars;  the  bonds 
fall  due  after  a  period  of  years  instead  of  months  or  days, 
and  they  are  issued  by  large  corporations,  municipalities 
and  governments,  rarely  by  individuals.  The  issue  is  split 
into  parcels  of  $1,000  or  less,  so  that  the  loan  may  be  widely 
distributed.  Capital  is  accumulated  into  stocks,  bonds  or 
bank  deposits  in  much  the  same  way,  that  is,  by  large  or 
small  amounts  in  proportion  to  the  surplus-wealth-creating 
ability  of  the  investor  or  depositor. 

The  study  of  the  value  of  bonds  is  of  a  technical  nature 
and  closely  resembles  the  study  of  credits.  The  bond 
expert  is  one  who  is  familiar  with  the  conditions  surround- 
ing every  issue  of  bonds.  He  is  able  to  appraise  the  value 
of  the  security  back  of  them,  he  has  exact  knowledge  of 
the  business  of  the  obligor,  or,  if  issued  by  a  municipality, 
he  investigates  the  amount  of  taxable  property,  the  interest 
on  an  issue  of  school  bonds,  for  instance,  being  paid  out  of 
taxes  upon  property  owners.  In  addition  to  purchasing 
bonds  for  investment,  many  banks  also  have  a  bond  de- 
partment.    This  department  buys  large  blocks  of  various 

74 


ELEMENTARY   BANKING 

issues,  which  are  then  sold  to  regular  customers  of  the 
bank  at  a  profit  or  commission.  The  principal  book  of 
record  in  this  department  is  the  bond  register  upon  which 
is  entered  a  full  description  of  the  bonds  held.  Bonds 
take  their  titles  from  certain  characteristics,  as,  for  in- 
stance, "government,"  "railroad,"  "school," — character  of 
the  obligor;  "extension,"  "refunding,"  "water-supply," — 
purpose  of  issue;    "4's,"  "5's," — rate  of  interest,  etc. 

A  place  where  buyer  and  seller  may  come  together  and 
trade  is  known  as  a  market.  By  the  establishment  of 
markets  the  seller  is  provided  with  a  place  where  he  may 
look  for  prospective  purchasers  and  vice  versa.  Stocks 
and  bonds  are  dealt  in  in  stock  markets  or  exchanges. 
Those  who  buy  and  sell  stocks  and  bonds  for  others  are 
"stock  brokers."  All  securities  are  practically  sold  at 
auction,  the  broker  being  paid  a  commission  for  his  ser- 
vices. The  prices  at  which  sales  are  made  are  published 
broadcast,  so  that  the  banker  who  accepts  stocks  or  bonds 
as  collateral  security  for  loans  is  able  to  estimate  their 
value  even  if  he  is  unfamiliar  with  all  the  conditions  that 
give  value  to  them.  All  bankers  should  familiarize  them- 
selves with  local  issues  of  both  stocks  and  bonds,  and  they 
should  know  where  to  get  reliable  information  concerning 
other  issues  which  may  either  be  offered  for  sale  or  used 
as  collateral  upon  loans.  Such  information  is  secured 
through  investment  specialists,  who  may  be  described  as 
credit  men  who  specialize  in  information  regarding  cor- 
porations, firms,  or  municipalities  borrowing  money  through 
bond  issues. 


75 


Savings  Banks 


As  we  have  seen,  banks  belong  to  three  main  groups — 
commercial,  savings  and  trust.  It  would  be  more  exact  to 
say  that  there  are  in  general  three  kinds  of  banking,  be- 
cause one  bank  may,  and  often  does,  transact  these  differ- 
ent kinds  of  business  under  one  roof.  National  banks  are 
essentially  commercial  banks,  yet  many  of  them  conduct 
savings  departments,  and  the  Federal  Reserve  Act  permits 
them  to  act  as  trustee,  executor,  registrar,  etc. — trust  com- 
pany functions — when  not  in  contravention  of  state  laws. 
State  commercial  banks  are  like  national  banks  in  these 
respects.  Deposits  in  commercial  banks  may  be  made  up 
largely  of  loans,  or,  putting  it  differently,  there  are  deposits 
of  credit  as  well  as  deposits  of  money.  In  the  sense  that 
deposits  of  cash  are  deposits  of  money  that  has  been  * 'saved," 
all  banks  may  be  said  to  be  institutions  for  the  receipt  and 
safeguarding  of  savings.  This  use  of  the  word  savings  is, 
therefore,  quite  common  in  bank  names,  although  a  bank 
using  the  word  in  its  title  may  in  reality  be  a  commercial 
bank.  In  the  State  of  Iowa  the  law  provides  for  the  organ- 
ization of  two  kinds  of  banks,  "state"  banks  and  "savings" 
banks,  and  the  designation,  savings,  is  required  by  the 
code.  Inasmuch  as  there  are  certain  advantages  to  be 
derived  in  organizing  under  the  savings  part  of  the  code, 
we  find  many  savings  banks,  so  called,  in  Iowa  which  are 
in  point  of  fact  ordinary  commercial  banks.  The  attention 
of  the  student  is  directed  to  this  point  because  of  the  con- 
fusion that  exists  on  account  of  the  variation  in  the  use 
of  terms  in  different  states.  Thus  in  Massachusetts  refer- 
ence to  a  bank  directory  will  disclose  but  three  kinds  of 
bank  titles — national  banks,  savings  banks  and  trust  com- 
panies. These  last  are  virtually  commercial  state  banks  with 
the  privilege  of  doing  "trust"  business  if  they  so  desire. 

76 


ELEMENTARY  BANKING 

Savings  banks  in  the  strict  meaning  of  the  term  are 
banks  organized  to  receive  the  savings  of  depositors,  to 
invest  them  in  loans  and  securities  of  the  very  safest  kind, 
and  to  pay  the  depositors  a  fair  rate  of  interest.  The  rela- 
tion between  the  savings  bank  and  its  customers  is  of  a 
close  and  confidential  nature.  The  depositors  are  for  the 
most  part  of  the  poorer  classes,  the  working  people  and 
the  thrifty  of  all  sexes  and  ages  who  seldom  accumulate 
enough  money  to  invest  it  for  themselves  even  if  possessed 
of  sufficient  business  judgment  to  wariant  their  doing  so. 
We  find  that  both  the  laws  of  the  state  and  the  rules  of 
savings  banks  throw  every  possible  safeguard  around  the 
savings  bank  depositor.  In  many  states  not  only  are  sav- 
ings banks  restricted  as  to  the  kind  of  investments  they 
may  make,  but  the  law  even  goes  so  far  as  to  designate  a 
list  of  specific  securities  which  are  classed  as  "legal  in- 
vestments for  savings  banks  and  trust  funds."  The  two 
most  common  forms  of  investments  for  savings  banks  are 
mortgages  upon  real  estate,  preferably  homes,  and  bonds. 
Among  the  latter  railroad  and  municipal  or  civic  bonds  are 
given  the  preference,  since  the  margin  of  safety  is  greater. 
Such  investments  are  possible  since  savings  deposits  are  of 
a  permanent  nature.  The  savings  bank  is  the  depository 
for  money  laid  by  for  a  "rainy  day,"  old  age,  sickness  and 
similar  needs.  Parents  open  accounts  for  their  children, 
partly  to  teach  them  the  habit  of  thrift,  partly  to  defray  the 
expenses  of  education.  The  young  married  couple  will 
deposit  the  funds  resulting  from  little  household  economies 
that  they  may  build  themselves  a  home,  and  there  are 
thousands  of  savings  accounts  the  owners  of  which  may  have 
no  other  definite  purpose  in  mind  except  the  instinct  to 
save,  which  is  natural  to  the  normal  human  being,  a  habit 
that  man  has  in  common  with  other  creatures  of  the  earth. 

There  are   two  kinds  of  savings   banks  in  the  United 

77 


ELEMENTARY   BANKING 

States,  the  stock  savings  bank  and  the  mutual  savings 
bank.  The  stock  savings  bank,  as  the  term  implies,  has 
capital  stock  and  is  organized  for  profit.  The  mutual  sav- 
ings bank,  found  almost  exclusively  in  the  section  east  of 
Ohio  and  north  of  Virginia,  has  no  capital  stock,  the  profits 
belonging  to  the  depositors  and  being  paid  to  them  as 
interest  upon  balances.  The  stock  savings  bank  has  a 
board  of  directors  and  the  affairs  of  the  institution  are 
managed  very  much  along  the  lines  of  the  average  com- 
mercial bank.  The  mutual  savings  banks  are  managed  by 
a  board  of  trustees,  which  is  a  self-perpetuating  body  chosen 
for  their  integrity  and  standing  in  the  community.  Of  the 
two,  the  mutual  banks  are  by  far  the  largest,  there  being 
at  least  four  with  deposits  of  over  one  hundred  millions  of 
dollars.  The  report  of  the  Comptroller  of  the  Currency  for 
1913  showed  total  deposits  in  mutual  savings  banks  to  be 
over  four  billions  of  dollars,  while  the  deposits  in  stock 
savings  banks  were  less  than  one  billion.  The  postal  sav- 
ings bank  system,  conducted  by  the  postoffice  department, 
is  a  concession  to  those  who  for  one  reason  or  another  do 
not  trust  banks.  Money  that  would  otherwise  be  hoarded 
is  put  into  productive  channels  through  the  operations  of 
the  postal  savings  system. 

Savings  bank  accounting  differs  from  other  bank  ac- 
counting only  to  the  extent  that  the  business  is  conducted 
with  a  different  class  of  depositors,  whose  needs  are  not  the 
same  as  the  needs  of  the  business  man  and  merchant. 
Savings  accounts,  being  comparatively  inactive  and  small 
as  compared  with  commercial  accounts,  are  usually  re- 
corded upon  ledgers  and  other  records  by  number.  Savings 
bank  balances  are  not  subject  to  check  as  a  rule,  nor  could 
they  very  well  be  since  the  investments  of  the  bank  are 
not  sufficiently  liquid  to  permit  withdrawal  without  due 
notice.     Some  banks  have  a  fixed  rule  requiring  two  weeks' 

78 


ELEMENTARY  BANKING 

notice  before  money  may  be  withdrawn;  others  pay  upon 
the  presentation  of  the  pass-book,  but  practically  all  of 
them  reserve  the  right  to  take  advantage  of  the  law,  when 
necessary,  which  permits  a  savings  bank  to  demand  sixty 
days'  notice  of  the  withdrawal  of  funds.  The  pass-book 
used  by  a  savings  bank  is  used  as  a  voucher  or  a  receipt, 
both  for  money  deposited  and  money  withdrawn.  It  is  also 
evidence  of  the  contract  between  the  bank  and  the  deposi- 
tor. The  pass-book  must  always  be  presented  when  money 
is  withdrawn,  the  depositor  being  required  to  identify  him- 
self not  only  by  possession  of  the  book,  but  by  his  signature 
and  his  ability  to  answer  test  questions,  for  example,  his 
mother's  maiden  name.  The  bank  is  not  required  by  law 
to  be  familiar  with  the  signature  except  that  it  is  a  means 
of  identification.  Many  of  the  depositors  may  be  illiterate 
or  they  may  be  children  whose  handwriting  undergoes  rapid 
changes,  consequently  many  savings  banks  use  the  finger- 
print method  of  identification.  These  precautions  are  neces- 
sary to  prevent  money  being  paid  out  to  imposters  who  may 
have  gotten  illegal  possession  of  a  pass-book.  In  order  to 
prevent  depositors  from  using  the  bank  as  a  temporary 
depository  for  idle  funds  there  is  usually  a  limit  placed  upon 
the  amount  anyone  may  deposit  in  a  single  year,  and  bal- 
ances over  a  certain  amount,  $3,000.00  for  example,  do  not 
draw  interest. 

Savings  banks  specialize  in  mortgage  loans  which  are 
loans  secured  by  real  estate.  A  mortgage  is  a  conditional 
deed  conveying  the  property  of  the  mortgagor,  the  borrower, 
to  the  mortgagee,  the  bank.  The  instrument  is  conditional 
in  that  it  is  void  if  the  borrower  meets  the  conditions  im- 
posed, namely,  the  payment  of  interest  and  principal  when 
due.  The  papers  incidental  to  a  mortgage  loan  are  the 
note  or  bond  which  is  the  evidence  of  debt;  the  mortgage 
duly  executed  which  is  the  security;    the  abstract  of  title, 

79 


ELEMENTARY  BANKING 

which  indicates  that  there  are  no  prior  liens  against  the 
property;  the  insurance  papers  which  protect  the  bank 
against  loss  if  the  mortgaged  property  is  destroyed  by  fire. 
In  applying  for  a  mortgage  loan,  the  applicant  describes  the 
property  and  states  the  amount  of  money  desired.  The 
value  of  the  property  is  then  estimated  by  the  bank's  ap- 
praiser, while  an  attorney,  or  a  title  insurance  company 
makes  a  * 'search"  to  determine  if  the  owner's  title  is  "clear." 
Only  first  mortgages  are  permitted  as  investments  by  sav- 
ings banks.  The  amount  of  money  that  may  be  loaned  is 
also  limited  by  law  varying  from  50%  to  60%  of  the  ap- 
praised value  of  the  real  estate.  The  essentials  of  security 
in  a  mortgage  loan  consist  of  such  considerations  as  the 
up-keep  of  the  property,  its  location  with  respect  to  transit 
facilities,  chances  of  depreciation  in  neighborhood  values, 
adaptability  of  buildings  for  more  than  one  use,  etc. 

As  a  banking  problem,  mortgage  loans  offer  an  interest- 
ing field  for  investigation  and  discussion.  How  is  it  that 
loans  based  upon  the  best  security  in  the  world,  improved 
real  estate,  cannot  be  so  regulated  as  to  permit  commercial 
banks  to  invest  in  them?  The  argument  against  such  loans 
by  commercial  banks  is  that  they  cannot  be  readily  con- 
verted into  cash  in  case  of  need ;  they  are  for  long  periods, 
and  in  case  of  foreclosure,  which  is  the  sale  of  the  property 
in  case  the  principal  or  interest  is  not  paid,  there  is  a  con- 
siderable amount  of  time  lost  in  the  legal  proceedings 
involved.  For  these  reasons  national  banks  have  not  been 
permitted  to  loan  money  upon  real  estate  mortgages.  Re- 
cently they  have  been  given  permission  to  make  such 
loans  subject  to  certain  restrictions,  provided  under  the 
Federal  Reserve  Act.  The  difficulty  has  been  that  mort- 
gage loans  have  been  allowed  to  drift  into  the  class  of 
permanent  investments.  Provided  the  security  is  good  and 
the  interest  has  been  paid  promptly,  the  banks  have  been 

80 


ELEMENTARY  BANKING 

content  to  allow  the  loans  to  run.  The  borrower,  instead  of 
paying  off  his  mortgage  loan  when  he  is  in  funds,  has  thus 
been  tempted  to  invest  in  more  property,  paying  back  the 
loan  only  when  he  sells  the  property  that  has  been  mort- 
gaged. Abroad,  the  borrower  begins  to  pay  back  the  loan 
in  installments  at  each  interest  period,  the  result  being  that 
mortgage  loans  are  as  liquid  an  investment  as  are  bonds  in 
this  country. 

As  has  been  stated,  certain  bond  issues  are  designated 
by  law  in  many  states  as  legal  investments  for  savings 
banks.  While  municipal  and  railroad  bonds  are  given  the 
preference  it  does  not  follow  that  all  bonds  of  these  classes 
are  acceptable,  nor  is  the  discrimination  made  along  arbi- 
trary lines.  Railroads  must  measure  up  to  a  high  standard 
of  efficiency  and  management  before  their  bonds  may  be 
designated  as  legal  investments  for  savings  banks.  So 
also  with  the  bonds  of  a  city  or  state.  The  total  bonded 
indebtedness  of  the  city  must  not  exceed  a  certain  percent- 
age of  the  value  of  taxable  property. 

The  accumulation  of  a  reserve  or  surplus  by  a  savings 
bank  is  very  essential.  Conforming  to  the  accounting 
principle  that  both  sides  of  the  statement  must  always 
balance,  the  bank  must  have  a  dollar  of  assets  for  every 
dollar  of  liabilities  at  all  times.  The  market  value  of  the 
investments  of  savings  banks,  consisting  largely  of  secur- 
ities, are  subject  to  fluctuations,  hence  it  is  necessary  that 
a  margin  of  safety  shall  be  provided  in  the  surplus  fund 
which  is  created  out  of  the  earnings.  Bonds  are  rarely 
bought  at  par  value;  if  the  interest  paid  is  fairly  high  and 
the  security  very  good,  bonds  will  sell  at  a  premium.  Let 
us  suppose  an  issue  of  bonds  is  bought  by  a  savings  bank 
as  an  investment  at  105.  That  means  each  $1,000.00  bond 
has  cost  $1,050.00.  If  the  bonds  fall  due  in  twenty  years, 
at  the  end  of  that  time  the  savings  bank  will  not  get  back 

81 


ELEMENTARY  BANKING 

$1,050.00  for  each  bond,  the  price  paid,  but  $1,000.00  or 
par.  How,  then,  shall  the  savings  bank  account  for  this 
apparent  loss  of  $50.00  on  each  bond?  Out  of  the  interest. 
At  each  interest  period,  or  once  each  six  months,  the  inter- 
est coupons  being  usually  paid  twice  yearly,  a  part  of  the 
income  is  applied  to  the  premium  that  was  paid  for  the 
bond,  so  that  by  the  time  the  bond  matures  the  entire 
premium  of  $50.00  is  restored.  The  process  by  which  this 
is  accomplished  is  called  amortization.  The  same  prin- 
ciple is  applied  but  with  reverse  effect,  when  a  bond  is 
bought  at  a  discount  or  at  a  lower  price  than  par. 

Enough  has  been  said  of  savings  banks,  their  purpose, 
methods  of  receiving  deposits  and  making  loans  to  indicate 
that  they  perform  a  very  important  service  in  the  business 
world.  They  accumulate  the  small  savings  of  the  multi- 
tude of  wage  earners,  money  which,  if  hoarded  or  squan- 
dered, would  be  of  use  to  nobody.  Through  the  loaning 
power  that  savings  banks  acquire,  the  result  of  the  thrift 
of  their  depositors,  men  are  able  to  borrow  money  with 
which  to  build  and  own  their  homes.  The  home  owner  is 
a  much  more  valuable  member  of  society  than  the  man 
who  owns  no  property.  These  same  savings,  that  have 
come  out  of  wages,  are  often  turned  back  into  the  very 
business  or  industry  that  has  produced  them  through  loans 
made  by  savings  banks.  If  there  were  no  funds  to  pur- 
chase bonds  there  would  be  little  industrial  or  civic  devel- 
opment in  the  shape  of  railroads,  telephone,  electric  lights, 
reservoirs,  sewage  systems,  schools  and  a  hundred  other 
modern  conveniences  that  not  only  add  to  our  comfort  and 
pleasure,  but  also  furnish  employment  for  thousands. 
Thrift,  then,  is  more  than  an  abstract  virtue;  it  is  an  eco- 
nomic necessity.  Men  who  are  thrifty  are  usually  indus- 
trious, self-respecting,  sober  and  law-abiding.  Hence,  we 
find  that  the  savings  banks  are  beginning  to  spread  thrift 

82 


ELEMENTARY  BANKING 

propaganda  through  advertising  and  in  other  ways,  not  only 
because  it  helps  their  business,  but  because  it  has  a  ten- 
dency to  raise  the  standard  of  the  people  in  general.  Schools 
are  installing  savings  systems  that  make  it  possible  for 
very  young  children  to  open  savings  accounts.  They  are 
thus  not  only  taught  the  value  of  the  saving  habit  at  an 
early  age,  but  they  become  familiar  with  banking  methods. 


83 


Trust  Companies 


A  trust  is  anything  of  value,  such  as  money  or  personal 
property  which  is  committed  into  the  care  of  another  for 
the  safekeeping,  use  or  benefit  of  the  owner.  This  implies 
confidence  on  the  part  of  the  owner  in  the  integrity  and 
reliability  of  the  person  trusted  who  is  called  the  trustee. 
Trustees  are  appointed  because  those  who  have  property 
either  cannot  or,  for  one  reason  or  another,  prefer  not  to 
act  for  themselves.  Thus,  while  all  banks  are  in  a  broad 
sense  trustees  for  their  depositors  in  that  they  care  for  the 
deposits  of  their  customers,  a  certain  group  of  banks  are 
organized  primarily  for  the  purpose  of  administering  trusts 
and  acting  in  a  fiduciary  capacity  generally.  Such  banks 
are  called  Trust  Companies.  Trust  companies  are  of  com- 
paratively recent  origin  and  they  are  the  newest  of  the 
three  great  groups  of  banks.  The  step  in  their  develop- 
ment or  evolution  has  not  been  from  the  bank  to  the  trust 
company,  but  from  the  individual  trustee  to  the  corporate 
trustee  or  trust  company.  In  the  early  days  of  the  country, 
individuals  assumed  the  obligation  of  trustees  for  other 
individuals  and  in  fact  this  custom  still  obtains,  especially 
in  sparsely  settled  districts.  As  men  have  become  more 
wealthy  and  as  accumulations  of  property  have  increased, 
there  has  arisen  the  need  for  some  organized  and  efficiently 
trained  body  of  men  who  could  administer  the  estates  and 
affairs  of  other  men  whether  living  or  dead.  There  are 
many  reasons  why  the  trust  company  is  better  fitted  than 
the  individual  to  perform  the  functions  of  a  trustee.  The 
individual  trustee  may  die,  or  move  away,  or  become  in- 
capacitated through  illness  or  lack  of  knowledge  of  the  law. 
The  trust  company  may  be  said  to  be  perpetual;  it  is  man- 
aged by  men  trained  both  in  law  and  in  finance  who  give 
their  entire  time  to  this  particular  business. 

84 


ELEMENTARY  BANKING 

Trust  companies  act  not  only  for  individuals,  but  also  for 
societies,  corporations  and  municipalities.  Their  principal 
functions  are  to  act  as  executor  of  wills,  administrator  of 
estates,  guardian  of  minors,  agents  for  individuals,  trustee 
under  mortgages,  transfer  agent  and  registrar  for  corpora- 
tions, fiscal  agent  for  governments,  states  and  municipali- 
ties, and  receiver  for  firms  and  corporations.  As  executor 
or  administrator  they  administer  the  estate  of  the  deceased 
according  to  the  law,  and  the  fees  for  such  service  are 
fixed  by  law  at  the  same  rates  as  individuals  are  permitted 
to  charge  for  like  services.  As  agents  for  individuals  they 
may  care  for  property,  collect  rents  and  perform  whatever 
other  duties  they  may  be  charged  with.  As  trustee  under 
mortgages,  the  trust  company  safeguards  the  interests  of 
the  mortgagee  and  will  foreclose  the  mortgage  if  principal 
or  interest  are  unpaid  at  maturity.  This  particular  feature 
of  the  trust  company's  business  is  usually  confined  to  acting 
as  trustee  under  a  bond  issue  which  is  secured  by  a  mort- 
gage upon  corporation  property.  As  transfer  agent  and 
registrar,  the  trust  company  certifies  as  to  the  genuineness 
of  either  a  stock  or  bond  issue  and  records  all  transfers  of 
such  stock  or  bonds.  The  company  does  not  guarantee 
the  payment  of  bonds  or  of  dividends  upon  stock;  it  merely 
vouches  for  the  regularity  of  issue  and  the  validity  of  the 
transactions  involved.  As  fiscal  agent  for  civic  divisions, 
money  is  collected  and  disbursed  upon  warrants  and  in  the 
payment  of  interest  on  bond  issues,  etc.  In  addition  to  the 
above,  trust  companies  act  in  various  other  capacities  of  a 
similar  nature. 

The  banking  department  of  a  trust  company  is  conducted 
like  any  other  bank.  Deposits  are  received  subject  to 
check,  interest  is  allowed  on  savings  deposits,  and  in  prac- 
tically every  particular  this  branch  of  the  business  is  the 
same  as  that  of  the  ordinary  bank  of  deposit  and  discount. 

'       '  85 


ELEMENTARY  BANKING 

Tellers  receive  and  enter  deposits,  pay  checks,  collect 
drafts  and  notes;  bookkeepers  keep  ledgers  and  make 
credit  and  debit  records  just  as  the  work  is  done  in  any 
other  bank,  and  similar  books  and  systems  of  accounting 
are  used.  In  Minnesota,  Michigan  and  Wisconsin,  trust 
companies  are  not  permitted  to  do  an  active  banking  busi- 
ness, but  are  restricted  to  the  handling  of  trusts  and  other 
fiduciary  matters.  As  to  loans  and  investments  permitted 
trust  companies,  state  laws  differ,  but  the  general  statement 
is  true  that  they  employ  their  funds  just  as  do  the  com- 
mercial state  banks. 

It  is  chiefly  in  the  trust  department  that  the  functions 
of  a  trust  company  are  distinctive.  The  estates  and  funds 
of  both  the  living  and  the  dead  are  cared  for  by  this  depart- 
ment. The  organization  of  the  trust  department  is  kept 
separate  from  the  banking  department.  As  money  is  re- 
ceived by  the  trust  department  representing  the  income 
from  property  or  investments  of  funds  held  in  trust,  it  is 
deposited  in  the  banking  department  and  is  checked  against 
by  the  trust  department  as  if  the  department  were  an  out- 
side depositor  or  customer.  It  would  be  possible  for  either 
department  to  exist  without  the  other.  The  field  of  the 
trust  company  has  become  so  highly  developed  and  its  trust 
functions  have  become  so  well  understood  by  the  public 
that  there  is  a  growing  demand  for  a  further  extension  of 
trust  company  powers.  This  is  evidenced  by  one  of  the 
provisions  of  the  Federal  Reserve  Act,  which  gives  to 
national  banks  the  privilege  of  acting  in  a  fiduciary  capacity 
when  not  in  contravention  of  state  laws. 


86 


Clearing   Houses 


A  bank  check  may  be  defined  as  a  written  order  drawn 
upon  a  bank  by  a  depositor  directing  the  bank  to  pay  a 
certain  sum  of  money  to  bearer,  to  a  payee  named  on  the 
instrument,  or  to  someone  else  named  by  the  payee.  In 
the  majority  of  cases  the  payee  does  not  himself  present 
the  check  for  payment.  Instead  he  deposits  it  to  his  credit 
in  another  bank,  thus  constituting  that  bank  his  agent. 
The  principal  business  dealings  that  banks  have  with  each 
other  grow  out  of  the  use  of  checks  by  individuals  and  their 
presentation  and  collection  by  banks. 

The  extensive  use  of  the  check  is  interesting  from  the 
bank  clerk's  point  of  view.  Approximately  90  per  cent,  of 
payments  are  made  by  check.  These  settlements  are  not 
made  in  money  but  in  credit.  That  is  to  say,  the  credit 
that  A  has  with  his  bank  is  transferred  to  B  in  the  payment 
of  debt  through  the  use  of  the  check.  Very  little  money, 
in  comparison  with  the  volume  of  transactions  involved, 
ever  changes  hands.  This  use  of  the  credit  instrument 
instead  gives  employment  to  probably  more  than  75  per  cent, 
of  all  the  employees  of  banks  doing  a  commercial  business. 
Tellers,  bookkeepers  and  their  assistants  in  all  depart- 
ments are  engaged  principally  in  keeping  the  records  inci- 
dental to  deposits  and  withdrawals  by  check. 

In  a  small  town  having  but  one  bank  all  of  the  checks 
growing  out  of  purely  local  business  are  drawn  upon  that 
institution.  Let  us  suppose  that  A  and  B  are  both  deposi- 
tors in  the  same  bank.  A  gives  B  his  check  for  $100.00  in 
payment  for  a  horse.  It  is  not  necessary  for  B  to  present 
the  check,  receive  the  money  and  then  redeposit  the  cash 
to  his  own  credit.  Instead,  he  deposits  the  check,  the  bank 
crediting  his  account  and  charging  the  account  of  A.  The 
same  process  is  being  followed  by  all  the  depositors  in 

87 


ELEMENTARY  BANKING 

making  settlements  with  each  other.  No  actual  cash 
changes  hands;  there  is  merely  an  offsetting  of  debits 
with  credits  on  the  books  of  the  bank.  This  is  known  as 
the  "clearing  principle." 

Banks  make  use  of  this  principle  in  settling  accounts 
with  each  other.  The  agency  through  which  they  avoid 
the  constant  transfer  of  money  among  themselves  is  the 
Clearing  House.  The  term  is  used  to  apply  either  to  the 
building  used  for  this  purpose  or  to  the  organization  or 
association  of  the  banks  united  together  for  this  and  other 
purposes.  In  its  practical  sense  the  clearing  house  repre- 
sents a  plan  rather  than  a  tangible  thing.  Let  us  suppose 
there  are  five  banks  which  are  members  of  a  clearing  house. 
At  the  end  of  the  day's  business  each  member  finds  itself 
with  checks  drawn  upon  the  other  four.  The  checks  of 
each  are  endorsed  with  the  bank  stamp,  enclosed  in  a 
separate  envelope  for  each  bank  and  a  total  of  the  checks 
is  listed  on  the  outside.  The  totals  are  then  listed  opposite 
the  bank  names  on  a  double  column  sheet  and  a  footing  is 
struck.  In  theory  each  bank  assumes  that  these  checks 
are  not  payable  by  the  individual  banks  but  by  the  * 'clear- 
ing house."  Therefore,  at  a  fixed  time,  usually  about  ten 
o'clock  A.M.,  each  bank  sends  a  messenger  to  the  clearing 
house  with  its  checks  against  the  other  banks.  In  a  small 
town  the  office  of  one  of  the  members  is  used  as  a  clearing 
house  and  an  officer  of  that  bank  acts  as  "manager."  The 
packages  are  then  exchanged.  Each  clerk  writes  opposite 
the  proper  name,  the  amount  of  the  checks  on  his  bank 
presented  by  the  others. 

These  amounts  are  added  up  and  the  smaller  amount  is 
subtracted  from  the  larger.  If  the  messenger  receives  more 
checks  on  his  own  bank  than  his  bank  had  on  the  others, 
then  he  is  a  "debtor."  If  the  reverse  is  true  then  he  is  a 
"creditor."    The  manager  then  takes  the  record   of  the 


ELEMENTARY  BANKING 

debtor  and  creditor  balances  which,  of  course,  must  be 
equal,  thus  proving  the  correctness  of  the  exchange.  The 
clerks  return  to  their  respective  banks  having  checks  only 
on  themselves,  whereas  they  came  to  the  clearing  with 
checks  only  on  their  neighbors.  The  whole  transaction 
will  not  have  consumed  more  than  ten  minutes.  Even  in 
the  very  largest  cities,  with  millions  of  dollars  involved,  the 
exchange  is  made  almost  as  quickly.  The  large  cities 
usually  have  a  separate  building  for  clearing  purposes  and 
employ  a  regular  manager  who  is  in  charge  of  the  clearing 
process. 

The  exchanges  having  been  made,  the  banks  now  pre- 
pare to  settle  the  balances.  There  are  various  ways  of 
doing  this,  depending  upon  the  size  of  the  city  and  the 
number  of  banks  in  the  clearing  house.  In  the  smaller 
towns  the  manager  of  the  clearing  house  draws  drafts  upon 
the  debtor  banks  which  he  gives  to  the  creditors,  who  then 
present  them  and  receive  either  the  cash  or  its  equivalent. 
Or  the  manager  may  deposit  the  drafts  of  the  debtor  banks 
with  one  of  the  members  and  draw  his  own  checks  against 
this  deposit  in  favor  of  the  creditors.  Another  method  is 
to  make  payment  by  draft  upon  the  Federal  Reserve  Bank 
of  the  district  or  upon  other  reserve  agents.  In  the  larger 
cities  settlement  is  made  in  cash  or  its  equivalent,  payment 
being  made  by  the  debtor  banks  to  the  clearing  house  which 
acts  as  agent  in  paying  over  the  money  to  the  creditor 
banks.  To  avoid  the  handling  of  even  this  money,  many 
clearing  houses  conduct  a  depository  where  deposits  of  gold 
and  currency  are  received,  and  certificates  in  large  de- 
nominations, $5,000.00  and  $10,000.00  are  then  issued. 
Settlements  made  with  these  certificates  are  upon  a  cash 
basis,  yet  the  danger  of  loss  or  error  in  handling  the  actual 
money  is  avoided.  The  saving  of  time  and  the  use  of 
money  is  well  illustrated  by  the  fact  that  in  New  York 

89 


ELEMENTARY  BANKING 

City  every  clearing  house  member  is  enabled  to  exchange 
checks  with  every  other  member  in  about  fifteen  minutes 
each  day,  and  the  balances  to  be  settled  average  less  than 
5  per  cent,  of  the  total  checks  exchanged. 

Certain  rules  are  prescribed  by  clearing  house  associa- 
tions covering  the  method  of  conducting  the  exchanges  and 
regulating  in  general  the  business  which  the  banks  do  with 
each  other.  For  example,  the  rules  fix  the  hour  for  clear- 
ing, method  of  making  settlements,  returning  of  unpaid 
items,  hours  for  opening  and  closing  the  banks,  and  many 
other  matters  that  are  adjusted  in  the  interest  of  regularity 
and  uniformity. 

Some  of  the  associations  employ  an  official  clearing  house 
examiner  who  supplements  the  examination  by  the  national 
or  state  bank  examiner,  paying  particular  attention  to  the 
loans  and  discounts.  He  is  employed  by  the  banks  to  give 
them  advice  as  to  their  methods  of  doing  business,  his  in- 
formation and  suggestions  being  extremely  confidential. 
He  makes  record  of  the  lines  of  credit  being  extended  by 
the  various  member  banks  and  is  thus  able  to  check  un- 
sound lines  before  any  damage  is  done.  His  functions  will 
be  described  in  greater  detail  in  the  next  chapter. 

The  clearing  principle  as  applied  to  check  collection  is 
not  limited  to  the  items  payable  in  one  city.  Many  clear- 
ing houses  have  also  a  department  for  the  clearing  of  country 
checks.  In  such  cases  all  the  member  banks  send  their 
out-of-town  items  within  a  certain  district  to  the  clearing 
house  which  operates  as  one  bank  acting  for  all.  Thus, 
instead  of  receiving  a  daily  letter  from  each  bank  in  the 
city,  the  country  bank  gets  all  its  checks  from  that  city  in 
one  letter  from  the  clearing  house,  to  which  it  then  remits 
with  a  single  draft.  The  Federal  Reserve  Act  has  carried 
this  process  one  step  further  by  requiring  the  Federal 
reserve  banks  to  act  as  clearing  houses  for  their  member 

90 


ELEMENTARY  BANKING 

banks.  Checks  which  each  member  bank  sends  to  the 
Federal  reserve  bank  acts  as  the  credit  offset  to  the  checks 
which  the  Federal  reserve  bank  receives  on  that  member. 
It  may  be  said  that  much  of  the  Federal  Reserve  Act  is  the 
result  of  experience  with  clearing  house  methods  and 
regulations. 


91 


Bank  Examinations 

In  a  previous  chapter  we  have  discussed  the  bank's 
statement  of  condition  which  sets  forth  in  detail  the  various 
amounts  the  bank  owes  to  its  stockholders,  depositors  and 
the  general  public.  Against  these  liabilities  the  bank  must 
hold  an  equal  amount  of  assets,  otherwise  the  bank  is 
insolvent  and  must  close  its  doors.  If  we  go  into  a  res- 
taurant for  luncheon  we  are  not  satisfied  merely  to  read 
the  bill-of-f are ;  we  want  to  try  some  of  the  dishes  for  our- 
selves. If  we  order  chicken  soup  and  the  waiter  brings  us 
a  bowl  of  warm  water,  we  refuse  to  accept  it,  no  matter  if 
the  proprietor  insists  that  it  is  chicken  soup  that  has  been 
set  before  us.  But  when  a  man  wishes  to  purchase  the 
stock  of  a  bank  or  deposit  money  with  it,  he  cannot  person- 
ally test  for  himself  the  quality  or  quantity  of  the  assets 
set  forth  on  the  bank's  statement  and  thus  assure  himself 
that  the  bank  is  sound.  There  may  be  no  intention  what- 
ever on  the  part  of  the  bank  to  deceive  or  defraud.  The 
bank  itself  may  be  deceived  in  its  ability  to  pay  the  amount 
of  the  deposit  on  demand  just  as  borrowers  often  honestly 
overestimate  their  ability  to  repay  a  loan  when  it  is  due. 
Therefore  the  law  provides  an  official  examiner  who  "tests 
the  soup"  for  the  general  public  who  may  deposit  or  invest 
their  money  in  the  bank. 

The  purpose  of  bank  examination  is  twofold;  first,  to 
see  that  the  institution  is  solvent,  having  a  dollar  of  assets 
with  which  to  pay  every  dollar  of  liabilities;  and,  second, 
to  ascertain  that  the  bank  is  obeying  the  law.  From  the 
examiner's  viewpoint  the  principal  reason  for  insisting  upon 
a  strict  observance  of  the  law  is  that  the  bank  may  continue 
to  be  solvent.  The  nature  of  these  laws  will  be  explained 
in  the  final  chapter. 

Bank  examinations  are  of  four  kinds,  two  of  which  may 

92 


ELEMENTARY   BANKING 

be  said  to  be  internal  and  two  external.  In  the  first  class 
are  examinations  by  a  committee  of  the  directors  and  ex- 
aminations by  certified  public  accountants  whom  the  direc- 
tors may  employ  to  make  this  audit  and  examination  for 
them.  The  official  Federal,  or  State  examinations,  and 
clearing  house  examinations  may  be  classed  as  external 
examinations.  The  internal  examinations  are,  of  course, 
not  unexpected  by  the  officers  of  the  bank,  who,  with  the 
directors,  arrange  for  them.  The  official  or  external  exam- 
inations are  never  announced  in  advance,  and  hence  they 
may  be  said  to  be  more  effective  if  there  should  exist  any 
condition  due  to  fraud  or  weakness  that  might  be  covered 
up  temporarily. 

It  is  rather  difficult  to  draw  the  line  clearly  between  an 
audit  and  an  examination;  yet  the  examination  by  directors 
or  accountants  for  the  directors  is  more  in  the  nature  of  an 
audit  than  an  examination.  It  is  the  duty  of  the  auditor  of 
a  bank  to  see  that  all  settlements  are  properly  made  by  the 
various  clerks  and  departments,  to  check  all  cross  entries 
on  the  books,  to  prove  interest  calculations,  to  reconcile 
accounts  with  other  banks  and  to  supervise  the  entire 
accounting  system  generally.  In  small  banks  one  of  the 
officers  has  charge  of  this  work.  When  the  directors  make 
their  annual  or  semi-annual  examination  they  certify  to 
the  correctness  of  all  transactions  as  of  a  certain  day.  Their 
examination  includes  a  proof  of  the  cash  and  a  checking 
up  of  the  loans  and  discounts.  In  very  large  banks  they 
usually  have  the  assistance  of  the  clerks  who  are  inter- 
changed so  that  the  same  men  will  not  be  used  in  proving 
any  books  or  cash  to  which  they  have  previously  had  access. 
Bank  directors  make  their  examinations  to  assure  them- 
selves that  the  bank's  affairs  are  in  proper  condition.  Al- 
though they  may  commit  the  operation  of  the  bank  to  the 
authorized  officers,  the  directors  cannot  thus  escape  their 

93 


ELEMENTARY  BANKING 

responsibility  or  liability  under  the  law  for  the  safe  admin- 
istration of  the  institution.  The  employment  of  a  certified 
public  accountant  to  do  this  work  is  a  more  thorough  way 
of  making  an  internal  examination,  since  the  accountant 
and  his  assistants  are  trained  men  and  have  the  advantage 
of  a  disinterested  point  of  view. 

The  National  or  State  examiners  make  their  visits  with- 
out notice;  usually  just  after  the  bank  has  closed  for  the 
day.  The  settlement  for  that  day's  business  is  then  checked 
and  all  cash,  checks  and  securities  are  put  under  seal  so 
that  no  substitution  can  be  made  over  night.  The  exam- 
ination then  proceeds  the  following  days  until  every  detail 
of  the  business  is  investigated  and  accounted  for.  The 
general  policy  of  the  bank  is  taken  into  consideration,  as 
indicated  by  the  nature  of  the  loans,  the  borrowing  habits 
of  the  customers,  the  methods  of  accounting  used  and  the 
general  observance  of  safe  and  conservative  business  rules. 
Like  the  physician  who  examines  a  patient,  the  official 
examiner  bases  his  methods  upon  the  assumption  that 
there  may  be  something  wrong  which  it  is  his  duty  to  detect 
and  remedy. 

The  clearing  house  examination  plan  is  a  sort  of  com- 
bination between  the  directors'  examination  by  certified 
accountants  and  the  official  examination.  The  clearing 
house  examiner  is  employed  jointly  by  all  the  banks  of  a 
city  and  his  examination  is  made  for  them,  but  in  his  power 
of  criticism  and  in  the  timing  of  his  visits  he  is  independent. 
His  examination  is  just  as  thorough  as  that  made  by  the 
Federal  or  State  examiner,  in  fact,  in  some  cities  the  two 
examinations  are  conducted  jointly.  Where  the  clearing 
house  examination  differs  is  in  the  attention  given  to  the 
loans  and  discounts.  The  clearing  house  examiner  makes 
a  record  of  all  loans  over  a  certain  amount  in  every  bank 
in  the  Association,  so  that  he  is  able  to  base  an  intelligent 

94 


ELEMENTARY  BANKING 

opinion  on  the  true  value  of  the  bank's  largest  group  of 
assets.  This  information  is  kept  under  lock  and  key  by 
the  examiner  and  is  used  by  him  as  credit  memoranda. 
He  is  thus  able  to  advise  the  banks  if  any  local  dealer  is 
borrowing  more  heavily  than  his  business  warrants.  The 
official  examiners  are  limited  in  their  powers  of  criticism 
to  infringement  of  the  laws,  but  it  is  the  duty  of  the  clearing 
house  examiner  to  act  in  an  advisory  capacity,  and  to  seek 
to  prevent  any  unsound  condition  from  arising.  The  Fed- 
eral Reserve  Act  provides  for  special  examinations  of  mem- 
ber banks  for  the  purpose  of  informing  the  reserve  banks 
of  the  lines  of  credit  being  extended  by  member  banks. 
In  principle,  these  special  examinations  are  similar  to 
clearing  house  examinations. 


95 


Banking  Laws 


Laws  affecting  banking  by  which  banks  are  organized, 
regulated  and  controlled  in  their  relations  with  the  public 
and  with  each  other,  are  the  result  of  many  years'  of  experi- 
ence in  banking.  As  we  have  had  occasion  to  note  in  the 
opening  chapters,  banking  is  based  primarily  on  natural  or 
economic  laws.  Statute  laws  pertaining  to  banking  have 
been  added  to  and  revised  from  time  to  time,  not  because 
there  has  been  any  appreciable  change  in  the  fundamentals 
of  business,  but  because  men  through  experience  and  a 
study  of  the  lessons  taught  by  experience  have  found  how 
to  correct  flaws  in  banking  methods  and  so  avoid  the  dan- 
gers and  pitfalls  of  a  previous  generation.  Thus  banking 
systems  have  undergone  a  gradual  but  steady  change  toward 
safer  and  more  efficient  standards.  It  is  like  the  discovery 
of  a  safe  channel  in  a  narrow  and  dangerous  waterway. 
After  there  have  been  many  wrecks  and  disasters  the  diffi- 
cult harbor  is  finally  reached  in  comparative  safety  by 
following  buoys  and  lights  that  mark  the  location  of  sub- 
merged rocks.  So  with  banking  laws.  Each  is  a  lighthouse 
that  safeguards  all  who  would  embark  in  this  business  of 
chance  and  risk,  from  losing  ship  and  cargo  upon  the  same 
treacherous  reef  that  has  wrecked  many  another. 

A  study  of  financial  history  with  its  eras  of  commercial 
prosperity  alternating  with  crises  and  depressions  will  dis- 
close the  reason  for  many  present-day  banking  laws.  In 
our  own  country  where  each  state  has  had  and  still  has  a 
banking  code  of  its  own,  modified  it  is  true  by  the  national 
system  made  necessary  by  one  of  the  most  terrible  wars  of 
modern  times,  we  can  trace  the  effect  of  all  these  factors 
upon  our  latest  legislation,  the  Federal  Reserve  Act. 

It  is  not  within  the  scope  of  the  present  volume  to  discuss 
the  Federal  Reserve  Act.     Before  the  student  is  able  to 

96 


ELEMENTARY   BANKING 

grasp  the  true  significance  of  its  provisions,  he  must  first 
have  a  clear  conception  of  the  underlying  principles  involved 
in  banking  and  banking  laws,  and  it  is  with  this  elementary 
phase  of  the  subject  that  we  are  here  concerned.  We 
may,  therefore,  discuss  briefly  a  few  typical  national  bank 
laws  that  will  serve  to  illustrate  the  nature  and  purpose  of 
all  banking  legislation,  whether  state  or  national. 

Many  of  the  more  important  regulations  have  to  do  with 
the  capital,  in  fact  nearly  all  the  privileges  and  restrictions 
of  the  business  are  based  directly  or  indirectly  upon  this 
first  item  of  the  bank's  liabilities.  The  minimum  amount 
of  capital  is  fixed  by  the  population  of  the  town  or  city  where 
the  bank  is  located;  the  larger  the  city  the  greater  the 
amount  of  capital  required.  The  reason  for  this  is  that 
since  there  can  be  no  limit  to  the  amount  of  business  a  bank 
may  do,  it  is  necessary  to  anticipate  the  probable  security 
that  must  be  given  to  prospective  depositors  who  would 
very  likely  be  more  numerous  in  a  large  city  than  in  a  small 
village.  To  make  the  security  even  greater,  stockholders 
of  all  national  banks  and  also  in  many  state  institutions 
are  doubly  liable.  That  is,  if  the  bank  should  fail  with 
not  enough  assets  to  meet  the  claims  of  depositors  and 
other  creditors,  not  only  would  the  money  due  the  stock- 
holders represented  by  the  capital  and  surplus  be  forfeited, 
but  the  stockholders  may  be  assessed  an  amount  up  to  the 
par  value  of  their  stock  to  meet  any  deficiency.  A  bank 
may  not  hold  or  purchase  its  own  stock  since  the  effect  of 
such  a  privilege  would  be  to  reduce  the  amount  of  the 
capital  by  that  much.  Not  all  the  provisions  in  law  tax  the 
stockholder  or  owner  of  the  bank  to  safeguard  the  interests 
of  those  who  trust  their  deposits  with  the  institution.  There 
is  one  provision  which  protects  the  capital  as  well  as  the 
deposit.  National  banks  are  required  to  build  up  a  surplus 
until  that  item  is  at  least  20  per  cent,  of  the  capital  stock. 

97 


ELEMENTARY  BANKING 

Any  losses  can  then  be  charged  to  this  fund  without  de- 
preciating the  capital.  Thus  it  is  the  aim  of  all  well-managed 
banks  to  create  as  large  a  surplus  as  possible  which  gives 
additional  strength  and  has  a  tendency  to  attract  deposits. 

One  of  the  greatest  financial  dangers  that  beset  a  nation 
is  credit  inflation.  In  "boom"  times,  when  all  lines  of 
trade  are  active,  crops  good,  labor  well  employed  and  every- 
body enjoying  unusual  prosperity,  there  is  a  national  ten- 
dency for  men  to  reach  out  for  even  greater  riches.  This 
is  the  result  of  that  predominant  characteristic  of  human 
wants  which  we  noted  in  an  early  chapter,  the  insatiability 
of  men's  desire  for  more  and  better  things.  During  such 
periods  as  we  have  described,  men  are  apt  to  become  overly 
optimistic  as  to  their  prospects.  The  result  is  that  credit  is 
often  extended  too  freely,  being  based  upon  hopes  founded 
on  fancy  rather  than  on  fact.  When  several  important  ven- 
tures collapse,  the  credit  that  was  based  upon  them  becomes 
valueless  and  then  a  sudden  fear  takes  hold  of  the  public. 
The  result  is  a  * 'panic."  It  is  the  purpose  of  such  laws  as 
the  Federal  Reserve  Act  not  only  to  curb  an  undue  expan- 
sion of  credit,  but  also  to  help  banks  prevent  a  panicky 
situation  from  spreading. 

There  are  many  safeguards  provided  by  law  against 
credit  inflation.  As  the  first  may  be  set  down  the  trained 
judgment  of  the  sagacious  banker  who  investigates  his 
customer's  statements  upon  which  the  loan  is  to  be  based. 
The  banker  knows  that  if  the  loan  cannot  be  paid  at  maturity, 
his  bank  may  lose  money.  Then  there  is  the  scrutiny  of 
the  bank  examiner  to  be  counted  on;  will  that  loan  pass  his 
inspection?  There  is  the  further  restriction  that  not  more 
than  10  per  cent,  of  the  capital  and  surplus  can  be  loaned 
to  one  interest.  This,  too,  has  a  tendency  to  prevent  too 
wide  an  extension  in  any  one  direction.  It  prevents  the 
bank  from  risking  too  many  eggs  in  one  basket.     Next, 

98 


ELEMENTARY  BANKING 

then,  is  the  provision  in  the  Federal  Reserve  Act  which 
restricts  rediscounting  to  loans  growing  out  of  actual  com- 
mercial transactions.  That  is,  the  loans  must  be  "self- 
liquidating,"  or  payable  out  of  the  proceeds  of  the  sale  of 
the  commodity  the  loans  represent.  It  will  not  do  to  redis- 
count real  estate  loans,  because  real  estate  is  a  fixed  and 
constant  quantity  which  does  not  increase  merely  by  change 
of  ownership,  whereas  staple  goods  that  men  use  in  the 
satisfaction  of  wants  are  produced,  bought  and  sold — and 
paid  for — at  all  times  and  in  ever-increasing  amounts. 
And  when  more  money  is  needed  to  handle  the  increase 
of  business,  the  issue  of  Federal  reserve  notes  must  be 
"covered"  by  100  per  cent,  of  paper  representing  these 
liquid  commercial  loans.  The  issue  must  also  be  backed 
by  40  per  cent,  gold  reserve.  If  we  trace  the  entire  process 
back  to  the  original  loan  we  discover  that  at  every  step 
the  law  throws  one  safeguard  or  another  against  inflation. 

The  successful  banker,  therefore,  is  not  he  who  is  satis- 
fied merely  to  avoid  losses  and  make  profits  for  his  stock- 
holders; he  is  the  man  trained  not  only  in  local  credits, 
but  also  in  national  and  international  conditions.  He  is 
well  versed  in  fundamental  economics;  he  knows  the 
financial  history  of  his  own  and  other  countries,  he  does 
not  protest  against  sound  bank  laws  because  he  knows 
why  those  laws  are  written.  In  fact,  for  him  there  is  no 
law,  because  his  judgment  is  proof  against  those  errors 
which  law  seeks  to  prevent.  And  finally,  he  never  forgets 
that  banking  is  conducted  for  the  benefit  of  all  the  people 
and  not  for  the  exclusive  profit  of  the  banker;  that  it  is 
other  people's  money  as  well  as  his  own  that  is  entrusted 
to  his  care,  that  it  may  be  wisely  used  for  the  welfare  of 
all  men. 


99 


American  Institute  of  Banking 

Organized  Education 

The  American  Institute  of  Banking  Section  of  the  American 
Bankers  Association  is  devoted  to  the  education  of  bankers 
in  banking  and  the  establishment  and  maintenance  of  a 
recognized  standard  of  education  by  means  of  official 
examinations  and  the  issuance  of  certificates  of  graduation, 
To  qualify  students  for  official  examinations  for  Institute 
certificates,  which  are  termed  final  examinations,  the 
Institute  provides  a  standard  course  of  study  in  the  form 
of  serial  text-books  and  collateral  exercises.  No  additional 
text-literature  is  required.  Such  study  course  is  divided 
into  two  parts.  Part  I  pertains  to  Banking.  Part  II 
pertains  to  Law.  In  suitable  cities  bank  employees  are 
organized  in  chapters  for  educational  work  in  accordance 
with  the  class  method  of  instruction.  Students  outside  of 
city  chapters  are  associated  in  the  Correspondence  Chapter 
and  provided  with  instruction  by  mail.  Chapter  organization 
and  education  are  thus  made  uniform  and  universal.  In 
correspondence  instruction  each  student  is  supplied  with 
the  serial  text-books  and  collateral  exercises.  The  exercises 
in  connection  with  each  lesson  are  to  be  submitted  to  in- 
structors whenever  done.  The  work  of  students  thus 
produced  is  corrected  and  returned  with  such  criticisms  and 
suggestions  as  may  be  helpful  in  each  case.  To  individual 
students  the  cost  of  correspondence  instruction  thus  provided, 
including  text-books  and  all  serial  as  well  as  final  examina- 
tions, is  $15  for  Part  I  pertaining  to  Banking  and  $15  for 
Part  II  pertaining  to  Law.  Payment  for  each  of  the  two  parts 
may  be  made  separately.  One-third  reduction  from  such  rates 
is  made  to  individual  students  who  are  employees  of  institu- 
tions that  are  members  of  the  American  Bankers  Association. 
Any  additional  information  will  be  furnished  on  application. 

AMERICAN  INSTITUTE   OF  BANKING 
Five  Nassau  Street  New  York  City 


UNIVERSITY  OP  CALIFORNIA  LIBRARY 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


v«  «* " 


MM  31  »»» 

WAV  26  1930 


30m-l,'15 


Ve  182 


o 


337388 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


G.  HOWARD  WOLFE 


IGKDBHCE  CBJUftKR,  Inc. 
AMEBIC  AB   IWSUtJffXE  02  BAJNKttfG 


